Amid the gloom and doom portrayed by the declining start-up rate—the ratio of new firms to all firms—over the past 30 years, there are some bright spots. A few were just highlighted by my frequent co-author, Ian Hathaway, in a blog entry for Harvard Business Review.

First, total funding of start-ups by venture capital firms, those in the business of trying to pick the fastest-growing firms, is up sharply since the recession: from about $4 billion in 2009 to about $7 billion in 2014.

Second, it is encouraging that venture-capital funding deals are increasingly spreading around the country, but the dollars allocated to start-ups are growing a bit more concentrated: in the top 5% of cities where any venture capital dollars flow (Silicon Valley, Boston, and New York in particular).

A true turnaround in the nation’s entrepreneurial activities still has a long way to go, but venture capital funding patterns are moving in the right direction.

Authors

Amid the gloom and doom portrayed by the declining start-up rate—the ratio of new firms to all firms—over the past 30 years, there are some bright spots. A few were just highlighted by my frequent co-author, Ian Hathaway, in a blog entry for Harvard Business Review.

First, total funding of start-ups by venture capital firms, those in the business of trying to pick the fastest-growing firms, is up sharply since the recession: from about $4 billion in 2009 to about $7 billion in 2014.

Second, it is encouraging that venture-capital funding deals are increasingly spreading around the country, but the dollars allocated to start-ups are growing a bit more concentrated: in the top 5% of cities where any venture capital dollars flow (Silicon Valley, Boston, and New York in particular).

A true turnaround in the nation’s entrepreneurial activities still has a long way to go, but venture capital funding patterns are moving in the right direction.

Authors

]]>
http://www.brookings.edu/research/papers/2015/02/24-wage-insurance-litan?rssid=litanr{2D144261-766A-42DC-96D3-22FB4AB763CC}http://webfeeds.brookings.edu/~/85883257/0/brookingsrss/experts/litanr~Wage-insurance-A-potentially-bipartisan-way-to-help-the-middle-classWage insurance: A potentially bipartisan way to help the middle classWith “middle class economics”
as his latest agenda,
President Obama has
pivoted the national domestic policy
agenda away from six years of
debate about stimulus and then
deficit reduction to ensuring that the
fruits of economic growth are broadly
shared. Even a number of apparent
Republican Presidential hopefuls –
Jeb Bush, Marco Rubio and Rand
Paul – and others, in recent speeches
or writings, have agreed with this
objective, implicitly if not explicitly.

The big debate going forward will
be over means and not ends. The
President would redistribute incomes
through changes in the income tax
code, while upgrading the skills of
both young people and older workers
seeking career improvement by
making two years of community
college free. Republicans have not yet
settled on a single counter-approach
– how could they be expected to,
there are many of them in Congress
and they don’t control the Executive
branch – but they clearly will oppose
redistribution. Instead, Republicans
are inclined to favor an “opportunity”
agenda that is likely to contain
multiple ideas: more school choice,
consolidating multiple federal antipoverty
programs into single funding
streams or block grants to the states,
tax reform that lowers individual and
corporate tax rates, and possibly
some form of wage subsidies.

The odds are long that Obama,
his party, and multiple Republican
factions will be able to agree on some
form of compromise (although the
word itself is a non-starter for many
Congressional members in both
parties) on a middle class
economic agenda in the
remaining two years of the
President’s second term.
But at least the debate will
have been started and some
core ideas from both parties
settled to give voters in 2016
a clear choice on which
approaches and policies
they prefer.

In that spirit, and with
no illusions that it will be
adopted in the next two
years, I reprise here an idea
primarily for addressing
middle class economic anxieties that
I have spent much of my professional
life as an economist promoting,
along with others inside and outside
Brookings: Wage insurance. I do not
advocate it as a silver bullet that will
magically ensure continued rapid
wage growth of middle class workers
and their families in the future, but
as one important element that can
help advance that objective, along
with improvements in the delivery
and financing of education of current
and future workers that better equips
with them with skills they will need to
realize continued income gains.

Downloads

Authors

]]>
Tue, 24 Feb 2015 10:00:00 -0500Robert E. LitanWith “middle class economics”
as his latest agenda,
President Obama has
pivoted the national domestic policy
agenda away from six years of
debate about stimulus and then
deficit reduction to ensuring that the
fruits of economic growth are broadly
shared. Even a number of apparent
Republican Presidential hopefuls –
Jeb Bush, Marco Rubio and Rand
Paul – and others, in recent speeches
or writings, have agreed with this
objective, implicitly if not explicitly.

The big debate going forward will
be over means and not ends. The
President would redistribute incomes
through changes in the income tax
code, while upgrading the skills of
both young people and older workers
seeking career improvement by
making two years of community
college free. Republicans have not yet
settled on a single counter-approach
– how could they be expected to,
there are many of them in Congress
and they don’t control the Executive
branch – but they clearly will oppose
redistribution. Instead, Republicans
are inclined to favor an “opportunity”
agenda that is likely to contain
multiple ideas: more school choice,
consolidating multiple federal antipoverty
programs into single funding
streams or block grants to the states,
tax reform that lowers individual and
corporate tax rates, and possibly
some form of wage subsidies.

The odds are long that Obama,
his party, and multiple Republican
factions will be able to agree on some
form of compromise (although the
word itself is a non-starter for many
Congressional members in both
parties) on a middle class
economic agenda in the
remaining two years of the
President’s second term.
But at least the debate will
have been started and some
core ideas from both parties
settled to give voters in 2016
a clear choice on which
approaches and policies
they prefer.

In that spirit, and with
no illusions that it will be
adopted in the next two
years, I reprise here an idea
primarily for addressing
middle class economic anxieties that
I have spent much of my professional
life as an economist promoting,
along with others inside and outside
Brookings: Wage insurance. I do not
advocate it as a silver bullet that will
magically ensure continued rapid
wage growth of middle class workers
and their families in the future, but
as one important element that can
help advance that objective, along
with improvements in the delivery
and financing of education of current
and future workers that better equips
with them with skills they will need to
realize continued income gains.

How many times in debate over K-12 education policy have you heard about the primacy of “local control”? Typically that means total control by school boards of virtually every facet of local education.

Dissatisfaction with local monopolies led, in part, to the charter school movement. Charters, which are public schools with a lot of autonomy in key employment decisions as well as curriculum, have evoked much controversy. Defenders (myself included) believe that they help promote some competition in schooling, while critics argue that they drain resources and talent away from other public schools.

But what if there were another way to reduce the local monopoly over schooling? What about expressly limiting school boards to deciding only a few things, such as which schools should remain open and which should close, while allowing individual schools–or, more specifically, their principals–run their own affairs? That would be local control over schooling.

The two argue persuasively that devolution of power and expanded control of education by principals at their schools would not only establish accountability for results, like those shareholders demand of any corporation, but would also cut out large costs of the bureaucracies that have grown up around local school boards. True, some of those costs for providing common services–such as transportation, food, and supplies–would still exist, but in a Hill/Jochim world these activities would no longer be controlled by the school board monopoly. Service providers would compete for business among multiple schools, like suppliers do for all businesses in the private sector. One benefit of all this that the authors don’t highlight: Some of the money saved by decentralized purchasing could help shore up weak teacher pension funds in many states.

States are where the revolution must begin. Changing state laws to permit localities to pare school board authority to the bare essentials would allow true competition and improvement in public schooling to take root. This kind of change is long overdue.

Authors

How many times in debate over K-12 education policy have you heard about the primacy of “local control”? Typically that means total control by school boards of virtually every facet of local education.

Dissatisfaction with local monopolies led, in part, to the charter school movement. Charters, which are public schools with a lot of autonomy in key employment decisions as well as curriculum, have evoked much controversy. Defenders (myself included) believe that they help promote some competition in schooling, while critics argue that they drain resources and talent away from other public schools.

But what if there were another way to reduce the local monopoly over schooling? What about expressly limiting school boards to deciding only a few things, such as which schools should remain open and which should close, while allowing individual schools–or, more specifically, their principals–run their own affairs? That would be local control over schooling.

The two argue persuasively that devolution of power and expanded control of education by principals at their schools would not only establish accountability for results, like those shareholders demand of any corporation, but would also cut out large costs of the bureaucracies that have grown up around local school boards. True, some of those costs for providing common services–such as transportation, food, and supplies–would still exist, but in a Hill/Jochim world these activities would no longer be controlled by the school board monopoly. Service providers would compete for business among multiple schools, like suppliers do for all businesses in the private sector. One benefit of all this that the authors don’t highlight: Some of the money saved by decentralized purchasing could help shore up weak teacher pension funds in many states.

States are where the revolution must begin. Changing state laws to permit localities to pare school board authority to the bare essentials would allow true competition and improvement in public schooling to take root. This kind of change is long overdue.

Words matter. As in advertising, how you sell your political message is as important as its content or design. Think of the success tax reformers had when they called the inheritance tax the “death tax.” Or how opponents of the president’s health-care law gathered political strength not only in rebranding the title of the bill from the Affordable Care Act but also in calling a medical reimbursements panel the “death panel.”

The Fed’s financial statements have long been audited by professionals, but Sen. Paul’s bill is not about that. Instead, he and those supporting his “audit” bill want the Government Accountability Office to give Congress annual reports on monetary policy functions of the Fed, or its core responsibilities.

If the same logic were applied to the private sector, then accountants would do far more than determine whether companies’ financial numbers are accurate: They would assess the performance of the business–something stock analysts do for public companies, and not always that well. What’s the issue here? Accountants are not trained to have experience in those businesses. Similarly, the economists employed by the GAO are no match for the economists at the Fed. It is not within their domain of expertise.

In creating the Fed, Congress established an expert, independent agency to manage the country’s monetary affairs. It’s fine for Congress to regularly asked the Fed, as it does other independent agencies, to report what it is doing. But why create, in effect, a “shadow Fed” elsewhere within the government, especially at time when lawmakers are trying to trim excess fat from federal spending?

If backers of the “audit the Fed” movement want to get rid of the agency, they should say so, and let that debate begin. If it does, central banks will win. No modern country operates without one, and it is inconceivable that the United States would prefer to have no central bank–and thus no way to fight financial panics other than to rely on Wall Street financiers, as was the case before the Fed was created (and policy makers had to trust J.P. Morgan to save the country). In the wake of the 2008-09 financial crisis, why would anyone want to embrace that approach?

If ending the Fed is not the objective, and “auditing” is the goal, this proposal is unnecessary and potentially dangerous. A well-established body of economic evidence makes clear that truly independent central banks keep inflation lower than in countries where finance ministries manage monetary affairs. Many of those who back “audit the Fed” legislation also want lower inflation. Clipping the Fed’s wings and politicizing monetary policy is hardly an outcome they should welcome.

Authors

Words matter. As in advertising, how you sell your political message is as important as its content or design. Think of the success tax reformers had when they called the inheritance tax the “death tax.” Or how opponents of the president’s health-care law gathered political strength not only in rebranding the title of the bill from the Affordable Care Act but also in calling a medical reimbursements panel the “death panel.”

The Fed’s financial statements have long been audited by professionals, but Sen. Paul’s bill is not about that. Instead, he and those supporting his “audit” bill want the Government Accountability Office to give Congress annual reports on monetary policy functions of the Fed, or its core responsibilities.

If the same logic were applied to the private sector, then accountants would do far more than determine whether companies’ financial numbers are accurate: They would assess the performance of the business–something stock analysts do for public companies, and not always that well. What’s the issue here? Accountants are not trained to have experience in those businesses. Similarly, the economists employed by the GAO are no match for the economists at the Fed. It is not within their domain of expertise.

In creating the Fed, Congress established an expert, independent agency to manage the country’s monetary affairs. It’s fine for Congress to regularly asked the Fed, as it does other independent agencies, to report what it is doing. But why create, in effect, a “shadow Fed” elsewhere within the government, especially at time when lawmakers are trying to trim excess fat from federal spending?

If backers of the “audit the Fed” movement want to get rid of the agency, they should say so, and let that debate begin. If it does, central banks will win. No modern country operates without one, and it is inconceivable that the United States would prefer to have no central bank–and thus no way to fight financial panics other than to rely on Wall Street financiers, as was the case before the Fed was created (and policy makers had to trust J.P. Morgan to save the country). In the wake of the 2008-09 financial crisis, why would anyone want to embrace that approach?

If ending the Fed is not the objective, and “auditing” is the goal, this proposal is unnecessary and potentially dangerous. A well-established body of economic evidence makes clear that truly independent central banks keep inflation lower than in countries where finance ministries manage monetary affairs. Many of those who back “audit the Fed” legislation also want lower inflation. Clipping the Fed’s wings and politicizing monetary policy is hardly an outcome they should welcome.

The conventional wisdom seems to be that the steep decline in world oil prices will dramatically slow investment in and use of various forms of “clean energy”–wind, solar, and biomass in particular.

It is true that declining oil prices have led to lowerprices of natural gas, which is a much cleaner fossil fuel than oil or coal, and that some gas exploration projects, like those for oil, are likely to be put on hold until oil and gas prices (which are closely linked) rise back up somewhat and stay there.

But true renewable sources of energy–wind, solar, and biomass–may be much less adversely affected by the plunge in oil prices than is widely believed. A recent blogpost on the Brookings Institution Web site by Devashree Saha and Mark Muro singled out two reasons for this seemingly counterintuitive conclusion:

First, oil is used primarily for transportation and not to produce electricity, whereas renewables play an increasing role in producing electricity. In other words, oil and renewables are not direct competitors.

Second, over the longer run, because of continuing technological improvements, the prices of renewables, especially solar power, are likely to drop much faster than is the case for commodity-based fuels such as oil. The prices of commodity-based fuels, which are traded in deep, liquid markets, also tend to be more volatile than those of renewables, for which there tend to be no separate markets (especially for fuels that are just inputs into generation of electricity).

Bottom line: The oil price plunge is good for consumers now and may not significantly halt the gradual increase in the share of energy generated from cleaner, renewable sources.

Authors

The conventional wisdom seems to be that the steep decline in world oil prices will dramatically slow investment in and use of various forms of “clean energy”–wind, solar, and biomass in particular.

It is true that declining oil prices have led to lowerprices of natural gas, which is a much cleaner fossil fuel than oil or coal, and that some gas exploration projects, like those for oil, are likely to be put on hold until oil and gas prices (which are closely linked) rise back up somewhat and stay there.

But true renewable sources of energy–wind, solar, and biomass–may be much less adversely affected by the plunge in oil prices than is widely believed. A recent blogpost on the Brookings Institution Web site by Devashree Saha and Mark Muro singled out two reasons for this seemingly counterintuitive conclusion:

First, oil is used primarily for transportation and not to produce electricity, whereas renewables play an increasing role in producing electricity. In other words, oil and renewables are not direct competitors.

Second, over the longer run, because of continuing technological improvements, the prices of renewables, especially solar power, are likely to drop much faster than is the case for commodity-based fuels such as oil. The prices of commodity-based fuels, which are traded in deep, liquid markets, also tend to be more volatile than those of renewables, for which there tend to be no separate markets (especially for fuels that are just inputs into generation of electricity).

Bottom line: The oil price plunge is good for consumers now and may not significantly halt the gradual increase in the share of energy generated from cleaner, renewable sources.

Authors

]]>
http://www.brookings.edu/research/opinions/2015/01/22-income-gap-narrower-than-we-think-litan?rssid=litanr{C16784D6-DDFF-4CCD-A466-0023E49FCEE5}http://webfeeds.brookings.edu/~/83885821/0/brookingsrss/experts/litanr~The-US-Income-Gap-May-Be-Narrower-Than-We-ThinkThe U.S. Income Gap May Be Narrower Than We Think

Although much will be said about President Barack Obama ’s State of the Union proposals to increase taxes for high-income workers and give middle- and lower-income taxpayers an additional break, one part of the inequality debate seems to be over.

The fact that incomes have been growing more unequal seems to be a politically settled issue–unlike, say, climate change. While Democrats, especially Sen. Elizabeth Warren, have been pounding away on inequality for some time, several likely Republican presidential candidates–including Jeb Bush, Marco Rubio, and Rand Paul–have also recognized the problem.

How bad is it? Thomas Piketty, writing with economist Emmanuel Saez, has estimated that those in the bottom 90% of the income distribution received only 9% of the income gains between 1979 and 2007 (the year before the onset of the Great Recession).

But their estimate ignores government transfer payments, and it doesn’t take into account the aging of the population, among other things. When these adjustments are made, a much less pessimistic result emerges.

This is the finding of a wonky but remarkably detailed essay that deserves much more attention than it has received. Written by George Washington University research scholar Stephen Rose and published by the Information Technology & Innovation Foundation last month, the essay uses income data compiled by the Congressional Budget Office, which Mr. Rose argues is more accurate than the income data on which Mr. Piketty and Mr. Saez relied.

The better estimate, Mr. Rose suggests, is that the bottom 90% captured 54% to 59% of the income gains, depending on the definition of income and price deflator used. Yet Mr. Rose acknowledges that even his estimate indicates widening inequality. Furthermore, in Mr. Rose’s calculations, most of that gain is income gains by the “upper middle class,” or families in the 81st-to-90th percentile.

The bottom line: Widening income inequality is not as bad as some alarmists have suggested, but it cannot be dismissed. At least leading figures in both parties agree on that–before the battles over what to do about it begin in earnest.

Authors

Although much will be said about President Barack Obama ’s State of the Union proposals to increase taxes for high-income workers and give middle- and lower-income taxpayers an additional break, one part of the inequality debate seems to be over.

The fact that incomes have been growing more unequal seems to be a politically settled issue–unlike, say, climate change. While Democrats, especially Sen. Elizabeth Warren, have been pounding away on inequality for some time, several likely Republican presidential candidates–including Jeb Bush, Marco Rubio, and Rand Paul–have also recognized the problem.

How bad is it? Thomas Piketty, writing with economist Emmanuel Saez, has estimated that those in the bottom 90% of the income distribution received only 9% of the income gains between 1979 and 2007 (the year before the onset of the Great Recession).

But their estimate ignores government transfer payments, and it doesn’t take into account the aging of the population, among other things. When these adjustments are made, a much less pessimistic result emerges.

This is the finding of a wonky but remarkably detailed essay that deserves much more attention than it has received. Written by George Washington University research scholar Stephen Rose and published by the Information Technology & Innovation Foundation last month, the essay uses income data compiled by the Congressional Budget Office, which Mr. Rose argues is more accurate than the income data on which Mr. Piketty and Mr. Saez relied.

The better estimate, Mr. Rose suggests, is that the bottom 90% captured 54% to 59% of the income gains, depending on the definition of income and price deflator used. Yet Mr. Rose acknowledges that even his estimate indicates widening inequality. Furthermore, in Mr. Rose’s calculations, most of that gain is income gains by the “upper middle class,” or families in the 81st-to-90th percentile.

The bottom line: Widening income inequality is not as bad as some alarmists have suggested, but it cannot be dismissed. At least leading figures in both parties agree on that–before the battles over what to do about it begin in earnest.

With the stock market’s unexpected boom toward the end of 2014, what better way to ring in the new year than to reexamine that age-old question: What drives stock returns? Is it earnings’ growth fundamentals or short-term momentum swings in investor behavior?

The answer matters because most forecasters expect the economy to grow faster this year than in 2014, which argues for another good year for the market.

But many traders will tell you that investors’ emotions matter a lot more. One emotional strategy has long attracted interest among financial economists: “momentum trading,” or buying as long as the market is going up, or short-selling when the market is headed in the other direction. Various studies have suggested that, at least for professional money managers who can buy and sell stocks in volume and keep their transaction costs low, this strategy can generate superior returns, even adjusted for the risk of periodic crashes. A December study by three economists at the Federal Reserve Bank of Chicago confirms this result.

The economists came to this conclusion by looking at stock returns during the “Victorian era,” in the second half of the 19th century, as well as from 1927 and 2012. Momentum trading paid off in both periods. This was true even when, according to the authors, the risk of a stock market crash seemed high: Investors poured money in and wanted it invested, so they kept pushing up prices until bubbles burst.

Does that mean that individual investors should try to be momentum investors too? No. Even with low brokerage commissions, the trading costs would eat away any superior returns. In addition, many investors don’t have stomach to bear the costs of those crashes.

So what’s the individual investor to do? Stick to the standard advice: Don’t try to time the market. If you have cash to invest, do it gradually and consistently (the “dollar cost” average way to invest), adjust your mix of stocks and bonds to your age (the older you are, the less of the former and more of the latter), and put your stock money in index funds.

It’s hard to do, but it’s best to sit back and not let emotional reactions to daily news tempt you to move your money around too much.

Let’s also hope the world will be a better place this year than the one before.

Authors

With the stock market’s unexpected boom toward the end of 2014, what better way to ring in the new year than to reexamine that age-old question: What drives stock returns? Is it earnings’ growth fundamentals or short-term momentum swings in investor behavior?

The answer matters because most forecasters expect the economy to grow faster this year than in 2014, which argues for another good year for the market.

But many traders will tell you that investors’ emotions matter a lot more. One emotional strategy has long attracted interest among financial economists: “momentum trading,” or buying as long as the market is going up, or short-selling when the market is headed in the other direction. Various studies have suggested that, at least for professional money managers who can buy and sell stocks in volume and keep their transaction costs low, this strategy can generate superior returns, even adjusted for the risk of periodic crashes. A December study by three economists at the Federal Reserve Bank of Chicago confirms this result.

The economists came to this conclusion by looking at stock returns during the “Victorian era,” in the second half of the 19th century, as well as from 1927 and 2012. Momentum trading paid off in both periods. This was true even when, according to the authors, the risk of a stock market crash seemed high: Investors poured money in and wanted it invested, so they kept pushing up prices until bubbles burst.

Does that mean that individual investors should try to be momentum investors too? No. Even with low brokerage commissions, the trading costs would eat away any superior returns. In addition, many investors don’t have stomach to bear the costs of those crashes.

So what’s the individual investor to do? Stick to the standard advice: Don’t try to time the market. If you have cash to invest, do it gradually and consistently (the “dollar cost” average way to invest), adjust your mix of stocks and bonds to your age (the older you are, the less of the former and more of the latter), and put your stock money in index funds.

It’s hard to do, but it’s best to sit back and not let emotional reactions to daily news tempt you to move your money around too much.

Let’s also hope the world will be a better place this year than the one before.

With the economy approach full capacity – the lowest unemployment rate consistent with stable inflation – attention must now turn to how to increase the potential rate of growth of the economy (“the supply side”) above the anemic official projections of roughly 2 percent.

In practical terms, this means reversing a three-decade long decline in the “startup rate”, or the ratio of new firms (those less than a year old) to total firms. New firms are important for productivity growth, the most important driver of potential growth of Gross Domestic Product (GDP), because they have no vested interest in the status quo, but rather are more likely to disrupt it than even to incrementally change it. It is no accident, for example, that many of the inventions that define modern life – the telephone, computers, cars, airplanes, air conditioning, and Internet search – were brought to us by (American) entrepreneurs, not established firms.

We only have an imperfect understanding of what has caused the secular drop in startup rates, although declining population growth and the rise of business concentration seem to play some role. There is still room for two constructive federal policy measures, however, and 2015 could the year when one or perhaps more are adopted at the federal level – assuming that a Republican Congress and a Democratic President can find a way to reach middle ground – or at the very least, next year will be one when a serious bipartisan conversation begins about these two topics so that necessary compromises could be reached in 2016 or shortly after the next Presidential election.

The first, and perhaps most obvious pro-startup policy change, is reform of U.S. immigration law to grant substantially more permanent work visas to high-skilled immigrants, especially those educated in U.S. universities and graduating with advanced degrees in science, technology, engineering and math (STEM), and those who launch a business in this country (the so-called “startup visa”). Sizeable expansions in the annual numbers of both types of visas are important for turning around the nation’s 30-year secular decline in entrepreneurship: immigrants generally, but especially those in tech fields, are more likely to launch a business than native-born Americans. A bipartisan comprehensive immigration reform bill, which included both the STEM graduate and startup visa measures, was passed by the Senate in 2013, but appears dead for now, in the wake of the mid-term elections, and Republican anger over President Obama’s Executive Order refraining from deporting approximately 5 million children of undocumented immigrants (which although technically can be reversed by a future President is politically almost certainly to be permanent).

At this writing, there is a reasonable chance that after emotions cool, a Republican Congress at some point in 2015 will develop and pass one or more piecemeal immigration reform measures. If this occurs, it is likely that these bills could include some additional permanent work visas for STEM graduates and more startup visas, with liberalized eligibility requirements (under current law, foreign entrepreneurs must bring with them $1,000,000, or $500,000 if the business is located in economically distressed area, and the total number is capped at 10,000 per year). If the President wants something more to add to his legacy, beyond the controversial steps he took on his own under the post-election Executive Order, he will not let the perfect be the enemy of the good, and will sign a suitable high-skilled immigration bill that has been sorely needed for some time.

A second entrepreneurship-related initiative is actually one that, at the very least, would not aggravate the secular decline in the entrepreneurship rate – an objective just as important as legislation that promises to increase it.

Specifically, I refer here to potential reform of the Affordable Care Act. Repeal of the Act will not happen on President Obama’s watch, since the ACA is perhaps the piece of legislation he most wants to be part of his legacy. At the same time, there is a slim chance the Administration could accept some modification to the Act, given its unpopularity, out of an effort to help some Congressional Democrats avoid defeat in 2016.

The key for current, and more important for potential entrepreneurs, is that any ACA reform not eliminate “guaranteed issue,” or the requirement that health insurers take all who want to sign up and not do not take their preexisting health conditions into account in setting premiums. Research has shown that the entrepreneurs are most successful when launching their businesses in their late 30’s or early 40s, which means that they typically must leave an existing employer that provides them and their families with health care coverage. If would-be entrepreneurs currently working for such firms have a preexisting health condition (and many do by this age) and they are not covered by their spouse’s health insurance policy, then in the absence of guaranteed issue, the inability to purchase affordable health insurance can be a significant deterrent to launching a business.

The ACA’s guaranteed issue provisions address this risk and thus represent an important benefit for entrepreneurs. Despite widespread discontent with the ACA in general, there seems to be much less opposition to retaining guaranteed issue as part of any ACA reform.

That’s the good news. The potentially bad news is that elimination of the individual mandate, which is one objective of those seeking ACA reform, would impose severe costs on health insurers and drive them, or policy makers, to take steps that could unravel health insurance markets. The individual mandate gives an insurers a broad enough pool of risks to help offset the problem of “adverse selection” – those with the greatest health care risks signing up for insurance – that a guaranteed issue requirement entails. Without that mandate, insurers accepting an unusually high volume of new customers (or renewals by those already signed up in the first year of the ACA) will need to raise premiums for all those they insure. This could induce some existing customers to drop or reduce their coverage, which would only increase the fraction of unhealthy patients in insurers’ risk pools, inducing insurers to increase premiums even further. Like a cat chasing its own tail, health insurance could descend into a death spiral, leaving only very high cost, unhealthy insureds as customers, clearly not a result that anyone in either party would want.

Alternatively, as insurers raise premiums, federal and/or state insurance regulators will face political pressure to curtail rate increases. If this happens, then insurers operating under a guaranteed issue requirement but without the individual mandate, will find their profits steadily eroding, perhaps morphing into losses. Over time, this will lead either or both to more consolidation of health insurance providers or the departure of some insurers from the business, resulting in less competition and choices for health insurance consumers – and yes, ultimately higher premiums, or if regulators do not permit them, then more exits and consolidation, another form of death spiral.

Accordingly, those who want to repeal the individual mandate will need to find another way of avoiding a meltdown of insurance risk pools if they want to retain guaranteed issue, as they should. The only other way I know of doing this would be for the federal government to providing subsidies to insurers who take on an unusual mix of unhealthy clients, beyond the subsidies that are now currently part of the ACA (and which are set to expire). But this will add to the budget deficit, which for the near future in any event, is a political non-starter.

Perhaps, and even hopefully, there are clever policy analysts out than I who can come up with another way to preserve guaranteed issue without unraveling health insurance risk pools. ACA reformers may need to find one if they are not to add to the burdens that budding entrepreneurs, especially those with industry and other real-world experience, already face when they seek to launch out on their own. My wish for 2015 – in addition to a breakthrough on immigration policy toward the highly skilled – is that this potential problem is solved as debate over the future of the ACA surely will intensify.

Authors

With the economy approach full capacity – the lowest unemployment rate consistent with stable inflation – attention must now turn to how to increase the potential rate of growth of the economy (“the supply side”) above the anemic official projections of roughly 2 percent.

In practical terms, this means reversing a three-decade long decline in the “startup rate”, or the ratio of new firms (those less than a year old) to total firms. New firms are important for productivity growth, the most important driver of potential growth of Gross Domestic Product (GDP), because they have no vested interest in the status quo, but rather are more likely to disrupt it than even to incrementally change it. It is no accident, for example, that many of the inventions that define modern life – the telephone, computers, cars, airplanes, air conditioning, and Internet search – were brought to us by (American) entrepreneurs, not established firms.

We only have an imperfect understanding of what has caused the secular drop in startup rates, although declining population growth and the rise of business concentration seem to play some role. There is still room for two constructive federal policy measures, however, and 2015 could the year when one or perhaps more are adopted at the federal level – assuming that a Republican Congress and a Democratic President can find a way to reach middle ground – or at the very least, next year will be one when a serious bipartisan conversation begins about these two topics so that necessary compromises could be reached in 2016 or shortly after the next Presidential election.

The first, and perhaps most obvious pro-startup policy change, is reform of U.S. immigration law to grant substantially more permanent work visas to high-skilled immigrants, especially those educated in U.S. universities and graduating with advanced degrees in science, technology, engineering and math (STEM), and those who launch a business in this country (the so-called “startup visa”). Sizeable expansions in the annual numbers of both types of visas are important for turning around the nation’s 30-year secular decline in entrepreneurship: immigrants generally, but especially those in tech fields, are more likely to launch a business than native-born Americans. A bipartisan comprehensive immigration reform bill, which included both the STEM graduate and startup visa measures, was passed by the Senate in 2013, but appears dead for now, in the wake of the mid-term elections, and Republican anger over President Obama’s Executive Order refraining from deporting approximately 5 million children of undocumented immigrants (which although technically can be reversed by a future President is politically almost certainly to be permanent).

At this writing, there is a reasonable chance that after emotions cool, a Republican Congress at some point in 2015 will develop and pass one or more piecemeal immigration reform measures. If this occurs, it is likely that these bills could include some additional permanent work visas for STEM graduates and more startup visas, with liberalized eligibility requirements (under current law, foreign entrepreneurs must bring with them $1,000,000, or $500,000 if the business is located in economically distressed area, and the total number is capped at 10,000 per year). If the President wants something more to add to his legacy, beyond the controversial steps he took on his own under the post-election Executive Order, he will not let the perfect be the enemy of the good, and will sign a suitable high-skilled immigration bill that has been sorely needed for some time.

A second entrepreneurship-related initiative is actually one that, at the very least, would not aggravate the secular decline in the entrepreneurship rate – an objective just as important as legislation that promises to increase it.

Specifically, I refer here to potential reform of the Affordable Care Act. Repeal of the Act will not happen on President Obama’s watch, since the ACA is perhaps the piece of legislation he most wants to be part of his legacy. At the same time, there is a slim chance the Administration could accept some modification to the Act, given its unpopularity, out of an effort to help some Congressional Democrats avoid defeat in 2016.

The key for current, and more important for potential entrepreneurs, is that any ACA reform not eliminate “guaranteed issue,” or the requirement that health insurers take all who want to sign up and not do not take their preexisting health conditions into account in setting premiums. Research has shown that the entrepreneurs are most successful when launching their businesses in their late 30’s or early 40s, which means that they typically must leave an existing employer that provides them and their families with health care coverage. If would-be entrepreneurs currently working for such firms have a preexisting health condition (and many do by this age) and they are not covered by their spouse’s health insurance policy, then in the absence of guaranteed issue, the inability to purchase affordable health insurance can be a significant deterrent to launching a business.

The ACA’s guaranteed issue provisions address this risk and thus represent an important benefit for entrepreneurs. Despite widespread discontent with the ACA in general, there seems to be much less opposition to retaining guaranteed issue as part of any ACA reform.

That’s the good news. The potentially bad news is that elimination of the individual mandate, which is one objective of those seeking ACA reform, would impose severe costs on health insurers and drive them, or policy makers, to take steps that could unravel health insurance markets. The individual mandate gives an insurers a broad enough pool of risks to help offset the problem of “adverse selection” – those with the greatest health care risks signing up for insurance – that a guaranteed issue requirement entails. Without that mandate, insurers accepting an unusually high volume of new customers (or renewals by those already signed up in the first year of the ACA) will need to raise premiums for all those they insure. This could induce some existing customers to drop or reduce their coverage, which would only increase the fraction of unhealthy patients in insurers’ risk pools, inducing insurers to increase premiums even further. Like a cat chasing its own tail, health insurance could descend into a death spiral, leaving only very high cost, unhealthy insureds as customers, clearly not a result that anyone in either party would want.

Alternatively, as insurers raise premiums, federal and/or state insurance regulators will face political pressure to curtail rate increases. If this happens, then insurers operating under a guaranteed issue requirement but without the individual mandate, will find their profits steadily eroding, perhaps morphing into losses. Over time, this will lead either or both to more consolidation of health insurance providers or the departure of some insurers from the business, resulting in less competition and choices for health insurance consumers – and yes, ultimately higher premiums, or if regulators do not permit them, then more exits and consolidation, another form of death spiral.

Accordingly, those who want to repeal the individual mandate will need to find another way of avoiding a meltdown of insurance risk pools if they want to retain guaranteed issue, as they should. The only other way I know of doing this would be for the federal government to providing subsidies to insurers who take on an unusual mix of unhealthy clients, beyond the subsidies that are now currently part of the ACA (and which are set to expire). But this will add to the budget deficit, which for the near future in any event, is a political non-starter.

Perhaps, and even hopefully, there are clever policy analysts out than I who can come up with another way to preserve guaranteed issue without unraveling health insurance risk pools. ACA reformers may need to find one if they are not to add to the burdens that budding entrepreneurs, especially those with industry and other real-world experience, already face when they seek to launch out on their own. My wish for 2015 – in addition to a breakthrough on immigration policy toward the highly skilled – is that this potential problem is solved as debate over the future of the ACA surely will intensify.

Republicans do not have the votes to repeal the Affordable Care Act in the next Congress. A bill revising the health-care law looks more likely, presuming Senate Republicans can forge a united front and then pick up some doubting Democrats to get the votes necessary to overcome a presidential veto. The prospect of such an outcome could force the president to work out a bipartisan reform package in an effort to head off a showdown that many in his party may not want.

A number of changes to the ACA have been suggested, including increasing the threshold of weekly hours that defines full-time employees (which in turn triggers the employer mandate), repealing the tax on medical devices, and repealing the individual purchase mandate.

If the ACA revision train leaves the station, an effort should be made to preserve a feature of the law that is key to helping reverse, or at least stabilizing, the decline in the entrepreneurship rate that I and my colleague Ian Hathaway have highlighted in a number of studies for the Brookings Institution and in several posts for this blog.

That feature, known as “guaranteed issue,” requires health insurers to take all applicants while prohibiting insurers from taking into account preexisting health conditions when setting rates. This provision is critical for everyone who has a prior health condition (and at some age, who doesn’t?), especially individuals who have coverage through their employers but who want to start their own business or join a start-up that does not provide insurance (and is too small to be required to do so under the ACA). If potential entrepreneurs have had any sort of serious health problem, the risks of going without insurance may deter them from making that entrepreneurial leap.

A recent study of the Massachusetts health-care law, which is similar to the ACA, supports the importance of guaranteed issue. The study, by economists at the Federal Reserve Bank of Kansas City, found that the self-employment share of total employment–which is one measure of entrepreneurship–remained flat in Massachusetts after that state’s health-care law went into effect, while the self-employment rate in other Northeastern states and in the U.S. as a whole continued to drop. This study suggests that retaining guaranteed issue would be critical if policymakers want to prevent further erosion in the national start-up rate or, ideally, hope to turn around that decline.

Now, there is a catch with guaranteed issue. If insurers have to take all comers and not differentiate rates by people’s health status, unless they have large enough risk pools they are at the mercy of “adverse selection,” or new customers having higher health costs than average. The individual mandate in the ACA addresses this problem. Without the mandate, insurers would need to raise the average rates for everyone in their pools to cover the higher claims of those with preexisting conditions. This could encourage some customers to drop their insurance, or incur political pressure to constrain the rate increases, or both. In any of these scenarios, the health insurance business could easily unravel over time.

In principle, Congress could prevent this from happening by providing federal subsidies to insurers beyond those already in the law. But those who favor repeal of the individual mandate may not be willing to do that. If they aren’t, someone will need to find a way to make the guaranteed-issue requirement work without unraveling insurance risk pools. Otherwise, reforming the ACA could aggravate the nation’s secular decline in entrepreneurship, an outcome that neither political party would want.

Authors

Republicans do not have the votes to repeal the Affordable Care Act in the next Congress. A bill revising the health-care law looks more likely, presuming Senate Republicans can forge a united front and then pick up some doubting Democrats to get the votes necessary to overcome a presidential veto. The prospect of such an outcome could force the president to work out a bipartisan reform package in an effort to head off a showdown that many in his party may not want.

A number of changes to the ACA have been suggested, including increasing the threshold of weekly hours that defines full-time employees (which in turn triggers the employer mandate), repealing the tax on medical devices, and repealing the individual purchase mandate.

If the ACA revision train leaves the station, an effort should be made to preserve a feature of the law that is key to helping reverse, or at least stabilizing, the decline in the entrepreneurship rate that I and my colleague Ian Hathaway have highlighted in a number of studies for the Brookings Institution and in several posts for this blog.

That feature, known as “guaranteed issue,” requires health insurers to take all applicants while prohibiting insurers from taking into account preexisting health conditions when setting rates. This provision is critical for everyone who has a prior health condition (and at some age, who doesn’t?), especially individuals who have coverage through their employers but who want to start their own business or join a start-up that does not provide insurance (and is too small to be required to do so under the ACA). If potential entrepreneurs have had any sort of serious health problem, the risks of going without insurance may deter them from making that entrepreneurial leap.

A recent study of the Massachusetts health-care law, which is similar to the ACA, supports the importance of guaranteed issue. The study, by economists at the Federal Reserve Bank of Kansas City, found that the self-employment share of total employment–which is one measure of entrepreneurship–remained flat in Massachusetts after that state’s health-care law went into effect, while the self-employment rate in other Northeastern states and in the U.S. as a whole continued to drop. This study suggests that retaining guaranteed issue would be critical if policymakers want to prevent further erosion in the national start-up rate or, ideally, hope to turn around that decline.

Now, there is a catch with guaranteed issue. If insurers have to take all comers and not differentiate rates by people’s health status, unless they have large enough risk pools they are at the mercy of “adverse selection,” or new customers having higher health costs than average. The individual mandate in the ACA addresses this problem. Without the mandate, insurers would need to raise the average rates for everyone in their pools to cover the higher claims of those with preexisting conditions. This could encourage some customers to drop their insurance, or incur political pressure to constrain the rate increases, or both. In any of these scenarios, the health insurance business could easily unravel over time.

In principle, Congress could prevent this from happening by providing federal subsidies to insurers beyond those already in the law. But those who favor repeal of the individual mandate may not be willing to do that. If they aren’t, someone will need to find a way to make the guaranteed-issue requirement work without unraveling insurance risk pools. Otherwise, reforming the ACA could aggravate the nation’s secular decline in entrepreneurship, an outcome that neither political party would want.

Authors

]]>
http://www.brookings.edu/research/opinions/2014/12/04-dont-break-up-google-litan?rssid=litanr{D2CF592B-DB83-4C91-AAC0-A6072697207F}http://webfeeds.brookings.edu/~/80459117/0/brookingsrss/experts/litanr~Breaking-Up-Google-is-Not-the-Way-for-Europe-to-GrowBreaking Up Google is Not the Way for Europe to Grow

Will Google get broken up by the EU, just as the US tried to do to Microsoft in the 1990s? It is no longer inconceivable now that the European Parliament took the unprecedented step on America’s Thanksgiving (of all days) of backing a non-binding resolution urging the EU’s Competition Directorate to “unbundle” search engines from their commercial activities. Parliamentary members have been clear that the resolution is aimed at Google.

I have some sympathy for the Europeans. On narrow antitrust grounds, I join them in worrying about potential abuses by firms with dominant market positions, and indeed spent about seven years of my life, in and out of the U.S. Justice Department, litigating against Microsoft, and later (albeit unsuccessfully) urging its breakup, for taking unlawful steps to entrench its operating system monopoly and extend it to other markets.

On broader grounds, Europeans are right to feel frustrated about the sluggish pace of their recovery from the Great Recession, and even to have some anger toward the policies in the United States that contributed to excessive subprime lending and financial institution leverage that led to the financial crisis precipitating that recession. But that anger is misdirected as it has nothing to do with Google. As for technology companies, in particular, there is much also much understandable angst over the way in which they have been used by the U.S. government in its intelligence gathering activities.

For the EU, there are bad and good ways to accelerate their recovery. The bad way is through protectionist punishment of U.S. technology companies, dressed up in antitrust clothes. The good way is to adopt policies that encourage growth through more entrepreneurship, of the kind that produced two recent European successful tech stories, Skype and Spotify. Let me briefly elaborate on each.

Take the alleged misdeed by Google: giving greater visibility to its search results for products, services and their prices than competing websites, including those of the companies identified in Google’s searches. The Federal Trade Commission in the United States looked into similar allegations several years ago and decided not to pursue them (full disclosure: I co-authored white paper on Google’s behalf arguing that it’s search algorithms did not constitute “unfair competition” under the FTC’s statute). Google has since offered to settle with the EU’s antitrust investigators by giving more prominence to rivals’ websites, and almost appeared to have reached a deal, but the political pressure on the Competition Directorate to impose something stiffer has ratcheted up for any number of unrelated reasons: continued weakness in European economies, and concerns about privacy and copyright relating to American tech companies.

Although it is impossible to know at this point how the new Competition Director, Margarethe Vestager, will respond to the Parliamentary vote, one thing should be clear: whatever Google has done, it can be rectified by means well short of breakup, since all that is involved is how Google’s search engine presents its results. The Microsoft situation was entirely different, involving multiple acts of abuse and where the costs of switching operating systems were much greater than switching search engines.

Instead of trying to help existing and new European companies compete by punishing American tech successes, Europeans and the rest of the world would fare far better if EU policymakers concentrated on ways to promote the formation of new tech companies. Two particular ideas stand out.

One is for European national governments to make computer coding part of their K-12 school curriculums, which they can more easily do than the United States where education policies are set at the state and local levels, and thus might give Europe a competitive advantage over the US. Talk to most tech startup founders, or even established tech companies, in the United States and the most binding constraint on their growth is finding good coding talent. This has to be just as true in Europe. Indeed, why wait for K-12 reforms? Europeans should copy and “one-up” the multi-week “code academies” that are sprouting all over the United States, enabling college graduates find the jobs that their liberal arts degrees won’t earn.

The second idea is to import more immigrant entrepreneurs. Foreign born entrepreneurs have a great track record in the United States, founding many successful tech companies in particular (Sergey Brin of Google is just one example). Spain, which has just launched a startup visa program, is showing the way. Don’t worry about backlash: companies launched by immigrants will employ European citizens.

Why would an American like me urge Europeans to do what even American policymakers find difficult doing? It would be good for Europe, and an economically healthy Europe is good for America. Moreover, if Europe could pull off either or both these reforms, it may encourage gridlocked U.S. politicians to do what is in our best interest, too. Economies on both sides of the Atlantic would be better off, as would the global economy.

Authors

Will Google get broken up by the EU, just as the US tried to do to Microsoft in the 1990s? It is no longer inconceivable now that the European Parliament took the unprecedented step on America’s Thanksgiving (of all days) of backing a non-binding resolution urging the EU’s Competition Directorate to “unbundle” search engines from their commercial activities. Parliamentary members have been clear that the resolution is aimed at Google.

I have some sympathy for the Europeans. On narrow antitrust grounds, I join them in worrying about potential abuses by firms with dominant market positions, and indeed spent about seven years of my life, in and out of the U.S. Justice Department, litigating against Microsoft, and later (albeit unsuccessfully) urging its breakup, for taking unlawful steps to entrench its operating system monopoly and extend it to other markets.

On broader grounds, Europeans are right to feel frustrated about the sluggish pace of their recovery from the Great Recession, and even to have some anger toward the policies in the United States that contributed to excessive subprime lending and financial institution leverage that led to the financial crisis precipitating that recession. But that anger is misdirected as it has nothing to do with Google. As for technology companies, in particular, there is much also much understandable angst over the way in which they have been used by the U.S. government in its intelligence gathering activities.

For the EU, there are bad and good ways to accelerate their recovery. The bad way is through protectionist punishment of U.S. technology companies, dressed up in antitrust clothes. The good way is to adopt policies that encourage growth through more entrepreneurship, of the kind that produced two recent European successful tech stories, Skype and Spotify. Let me briefly elaborate on each.

Take the alleged misdeed by Google: giving greater visibility to its search results for products, services and their prices than competing websites, including those of the companies identified in Google’s searches. The Federal Trade Commission in the United States looked into similar allegations several years ago and decided not to pursue them (full disclosure: I co-authored white paper on Google’s behalf arguing that it’s search algorithms did not constitute “unfair competition” under the FTC’s statute). Google has since offered to settle with the EU’s antitrust investigators by giving more prominence to rivals’ websites, and almost appeared to have reached a deal, but the political pressure on the Competition Directorate to impose something stiffer has ratcheted up for any number of unrelated reasons: continued weakness in European economies, and concerns about privacy and copyright relating to American tech companies.

Although it is impossible to know at this point how the new Competition Director, Margarethe Vestager, will respond to the Parliamentary vote, one thing should be clear: whatever Google has done, it can be rectified by means well short of breakup, since all that is involved is how Google’s search engine presents its results. The Microsoft situation was entirely different, involving multiple acts of abuse and where the costs of switching operating systems were much greater than switching search engines.

Instead of trying to help existing and new European companies compete by punishing American tech successes, Europeans and the rest of the world would fare far better if EU policymakers concentrated on ways to promote the formation of new tech companies. Two particular ideas stand out.

One is for European national governments to make computer coding part of their K-12 school curriculums, which they can more easily do than the United States where education policies are set at the state and local levels, and thus might give Europe a competitive advantage over the US. Talk to most tech startup founders, or even established tech companies, in the United States and the most binding constraint on their growth is finding good coding talent. This has to be just as true in Europe. Indeed, why wait for K-12 reforms? Europeans should copy and “one-up” the multi-week “code academies” that are sprouting all over the United States, enabling college graduates find the jobs that their liberal arts degrees won’t earn.

The second idea is to import more immigrant entrepreneurs. Foreign born entrepreneurs have a great track record in the United States, founding many successful tech companies in particular (Sergey Brin of Google is just one example). Spain, which has just launched a startup visa program, is showing the way. Don’t worry about backlash: companies launched by immigrants will employ European citizens.

Why would an American like me urge Europeans to do what even American policymakers find difficult doing? It would be good for Europe, and an economically healthy Europe is good for America. Moreover, if Europe could pull off either or both these reforms, it may encourage gridlocked U.S. politicians to do what is in our best interest, too. Economies on both sides of the Atlantic would be better off, as would the global economy.

Lost up to now in the intense debate over whether access to the Internet should be “reclassified” as a public utility as advocates of “strong net neutrality” want, is how much more consumers would have to pay for their residential and wireless broadband service.

Before revealing the answer, here is where things stand in the ongoing net neutrality soap opera. In early November, FCC Chairman Tom Wheeler floated a “hybrid” compromise that would have deemed Internet service providers (ISPs) – telcos and cable companies – as public utilities under Title II of the Telecommunications Act for purposes of their dealings with websites, such as Netflix. But when it came to the rates and download speeds offered to broadband customers, ISPs would continue to be subject to “light touch” regulation under Section 706 of the Act, which directs the Commission to promote broadband deployment. This would allow them to give their customers choices: those who were willing to pay more for higher speeds could. Think of it as being willing to pay more to take the faster Acela train as opposed to the regular Amtrak line.

President Obama was not satisfied with this approach, and urged in an unusual video released on November 10 that the Commission embrace a full-throated version of Title II for broadband access as well. What this means is that the Internet would be treated and regulated as a public utility, like your local electricity and gas distribution company, which is a monopoly. The President and other strong net neutrality advocates want this “reclassification” to prohibit ISPs from charging content providers for priority delivery for fear that ISPs could shake down vulnerable websites with excessive charges. Never mind the fact that Title II is not needed to protect against such harms: A simple prohibition of or a strong presumption against (1) exclusive dealing for priority, and (2) degrading an edge provider’s service for refusing to take priority would protect edge providers, and both remedies are available under current law (section 706).

We and others have pointed out that even this reclassification may not stop what the president wants: if ISPs are put under a Title II regulatory regime, the language of the Telecommunications Act only prohibits “unreasonable discrimination,” so that the FCC still could not ban pay-for-priority under Title II. The best they could do is to require ISPs to make any priority offers available to all comers at the same terms. While there are some remote circumstances (decades ago) in which the FCC has banned conduct that it deemed “inherently unjust,” those cases involved monopoly providers seeking to extend their power into closely related markets—a far cry from what a competitive broadband provider would be trying to accomplish with priority payments.

But until now we have not highlighted that once ISPs are labeled “telecommunications providers” under Title II, their services become subject to both federal and state fees that apply to those services. The two main federal charges are an excise tax and a state-collected fee for “universal service,” while state fees and charges vary from state to state, and within states by locality. Although broadband providers would pay into the FCC’s funds, history shows—and economic models of competitive markets predict—that the fees would quickly be passed along to customers, just as they are now on other telecommunication products. So consumers’ Internet bills will soon have all those random charges tacked on at the end, much like their phone bills are.

To calculate the percentage increase consumers can expect from reclassification, we have used the average prices for wireless residential broadband across U.S. cities ($44.75 per month for 15-20 Mbps) estimated in a recent study by the Open Technology Institute (which are roughly $5 higher per month than the U.S. average estimated in 2012 by the European Commission for 12-30 Mbps), and figures for average consumer mobile service bills from the CTIA. We then used data from Vertex and CCH Clearinghouse for the non-business federal, state and local charges (for 911 charges, universal-service-fund fees, utility fees, etc.), keeping a low and a high figure because the local tax rate often varies within a state. (In contrast, the fixed-dollar component of the fees does not vary.) Full state-by-state results are available in an Excel supplement here [Will be hyperlinked]..

The bottom line: Annual residential (wireline) broadband costs would likely go up by $8 in Delaware to almost $148 in certain parts of Alaska. The average fee for wireline households would range from $51 to $83 per year. Because the assumed monthly price of a mobile plan is not much different from the price of wireline broadband plan, and because wireless broadband services would also be reclassified, mobile broadband customers would experience an increase of similar magnitude.

For consumers that have both wireline and wireless broadband, the estimated increases are essentially double those of residential alone. And this will be on top of the FCC’s planned 16-cent-per-month (or $1.92 per year) increase in wireless fees to add $1.5 billion to the fund that finances Internet connections in schools.

The federal charges imposed on broadband providers under a Title II reclassification go into effect unless Congress were to explicitly exempt them. Likewise, it would take state or local legislative action to repeal the state charges.

So not only will Title II’s regulation of Internet prices discourage ISPs from investing in broadband infrastructure—leading to more congestion and higher access prices—but it will also mean higher taxes for U.S. broadband consumers. Barring a mass migration to Delaware, the (simple) average increase for all Americans for fixed and mobile combined will be between $106 and $171 of new fees per year. When the average annual fee increase for wireline ($67) and wireless ($72) broadband plans is multiplied across U.S. residential wireline (84 million) and wireless (131 million) broadband connections, respectively, the aggregate expenditures on the new fees could reach $15 billion per year. Enjoy!

Authors

Lost up to now in the intense debate over whether access to the Internet should be “reclassified” as a public utility as advocates of “strong net neutrality” want, is how much more consumers would have to pay for their residential and wireless broadband service.

Before revealing the answer, here is where things stand in the ongoing net neutrality soap opera. In early November, FCC Chairman Tom Wheeler floated a “hybrid” compromise that would have deemed Internet service providers (ISPs) – telcos and cable companies – as public utilities under Title II of the Telecommunications Act for purposes of their dealings with websites, such as Netflix. But when it came to the rates and download speeds offered to broadband customers, ISPs would continue to be subject to “light touch” regulation under Section 706 of the Act, which directs the Commission to promote broadband deployment. This would allow them to give their customers choices: those who were willing to pay more for higher speeds could. Think of it as being willing to pay more to take the faster Acela train as opposed to the regular Amtrak line.

President Obama was not satisfied with this approach, and urged in an unusual video released on November 10 that the Commission embrace a full-throated version of Title II for broadband access as well. What this means is that the Internet would be treated and regulated as a public utility, like your local electricity and gas distribution company, which is a monopoly. The President and other strong net neutrality advocates want this “reclassification” to prohibit ISPs from charging content providers for priority delivery for fear that ISPs could shake down vulnerable websites with excessive charges. Never mind the fact that Title II is not needed to protect against such harms: A simple prohibition of or a strong presumption against (1) exclusive dealing for priority, and (2) degrading an edge provider’s service for refusing to take priority would protect edge providers, and both remedies are available under current law (section 706).

We and others have pointed out that even this reclassification may not stop what the president wants: if ISPs are put under a Title II regulatory regime, the language of the Telecommunications Act only prohibits “unreasonable discrimination,” so that the FCC still could not ban pay-for-priority under Title II. The best they could do is to require ISPs to make any priority offers available to all comers at the same terms. While there are some remote circumstances (decades ago) in which the FCC has banned conduct that it deemed “inherently unjust,” those cases involved monopoly providers seeking to extend their power into closely related markets—a far cry from what a competitive broadband provider would be trying to accomplish with priority payments.

But until now we have not highlighted that once ISPs are labeled “telecommunications providers” under Title II, their services become subject to both federal and state fees that apply to those services. The two main federal charges are an excise tax and a state-collected fee for “universal service,” while state fees and charges vary from state to state, and within states by locality. Although broadband providers would pay into the FCC’s funds, history shows—and economic models of competitive markets predict—that the fees would quickly be passed along to customers, just as they are now on other telecommunication products. So consumers’ Internet bills will soon have all those random charges tacked on at the end, much like their phone bills are.

To calculate the percentage increase consumers can expect from reclassification, we have used the average prices for wireless residential broadband across U.S. cities ($44.75 per month for 15-20 Mbps) estimated in a recent study by the Open Technology Institute (which are roughly $5 higher per month than the U.S. average estimated in 2012 by the European Commission for 12-30 Mbps), and figures for average consumer mobile service bills from the CTIA. We then used data from Vertex and CCH Clearinghouse for the non-business federal, state and local charges (for 911 charges, universal-service-fund fees, utility fees, etc.), keeping a low and a high figure because the local tax rate often varies within a state. (In contrast, the fixed-dollar component of the fees does not vary.) Full state-by-state results are available in an Excel supplement here [Will be hyperlinked]..

The bottom line: Annual residential (wireline) broadband costs would likely go up by $8 in Delaware to almost $148 in certain parts of Alaska. The average fee for wireline households would range from $51 to $83 per year. Because the assumed monthly price of a mobile plan is not much different from the price of wireline broadband plan, and because wireless broadband services would also be reclassified, mobile broadband customers would experience an increase of similar magnitude.

For consumers that have both wireline and wireless broadband, the estimated increases are essentially double those of residential alone. And this will be on top of the FCC’s planned 16-cent-per-month (or $1.92 per year) increase in wireless fees to add $1.5 billion to the fund that finances Internet connections in schools.

The federal charges imposed on broadband providers under a Title II reclassification go into effect unless Congress were to explicitly exempt them. Likewise, it would take state or local legislative action to repeal the state charges.

So not only will Title II’s regulation of Internet prices discourage ISPs from investing in broadband infrastructure—leading to more congestion and higher access prices—but it will also mean higher taxes for U.S. broadband consumers. Barring a mass migration to Delaware, the (simple) average increase for all Americans for fixed and mobile combined will be between $106 and $171 of new fees per year. When the average annual fee increase for wireline ($67) and wireless ($72) broadband plans is multiplied across U.S. residential wireline (84 million) and wireless (131 million) broadband connections, respectively, the aggregate expenditures on the new fees could reach $15 billion per year. Enjoy!

Downloads

Authors

]]>
http://www.brookings.edu/research/opinions/2014/11/20-even-piecemeal-immigration-reform-boost-economy-litan-hathaway?rssid=litanr{2F567D3B-CBB1-4876-AABD-006C46BC27E9}http://webfeeds.brookings.edu/~/79143484/0/brookingsrss/experts/litanr~Even-Piecemeal-Immigration-Reform-Could-Boost-the-US-EconomyEven Piecemeal Immigration Reform Could Boost the U.S. Economy

With President Obama expected to make a statement about immigration tonight, Washington is gearing-up for a fight over the President’s seeming willingness to exercise his executive authority to prevent the deportation of primarily low-skilled immigrants. While that’s worth watching, the more important economic picture risks getting lost: the impact that immigrants can bring to the American economy in the long-term. It’s the immigration discussion we ought to be having, and if the rumors are correct as of this writing, it’s the one the President will at least partially extend in the executive action that he will outline.

High-skilled immigrants are good for America, and we should encourage more of them to come here given recent trends in entrepreneurship, where more firms are dying than being created every year. But high-skilled immigrants could help turn that trend around — they are twice as likely to start businesses as native-born Americans. This is especially true in high-tech sectors, where immigrants are not only more likely to start firms, but also to patent new technological discoveries. Giving green cards to foreign students completing STEM degrees at U.S. universities, and to many more immigrant entrepreneurs, would increase income and employment opportunities for American workers across the board.

We have recently published new evidence at the Brookings Institution that supports the link between immigration reform and economic growth. Our research brings a new perspective — the importance of entrepreneurs — to an older idea: the link between greater population growth and economic expansion.

This connection was at the heart of concerns expressed by Harvard economist Alvin Hansen in his address, “Economic Progress and Declining Population Growth,” before the American Economic Association in 1938. Hansen worried that what he saw as falling rates of population growth and technological advance portended a slump in investment, which would lead to persistently low employment and income growth. Hansen’s forecast never came true, thanks to post-war booms in innovation and fertility rates.

Three-quarters of a century later, another Harvard economist, Larry Summers, has updated Hansen’s concept of “secular stagnation” to describe post-recession slow growth across much of North America and Europe. In the year since Summers first made his remarks, economists have been debating whether and to what extent his thesis will hold in the future.

Much less publicized is another debate that concerns the current and future state of U.S. economic growth — that of a pervasive decline in the rate of firm formation and economic dynamism. We and others have documented this decline in a broad range of sectors and regions throughout the United States during the last few decades—a decline that even reached the high-tech sector and so-called high-growth firms, the small group of (often young) businesses that are responsible for creating the bulk of U.S. jobs.

And the U.S. wasn’t alone. This decline was observed in other advanced economies of the OECD, suggesting that large global factors are at play.

This evidence runs counter to the narrative that an entrepreneurial renaissance is sweeping the globe, and the seeming endless technological change disrupting the economy. We also see plenty of those signs around us, but their impacts haven’t yet been reflected in the data. Even if they were, their effects would be following more than three decades of persistent decline.

Our most recent Brookings research suggests that slowing population growth hurts entrepreneurship. This was particularly true beginning in the 1980s in America’s West, Southwest, and Southeast regions — once places with the highest rates of new firm formation as the population surged in the 1970s. During the three decades that followed, however, the formation of new businesses fell partly because population growth slowed.

In other words, population growth matters.

George Mason University economist Tyler Cowenrecently warned that the “relatively neglected field” of population economics could hold answers to the period of slow growth facing much of the developed world. For Cowen, one solution is obvious: absorb more immigrants. We couldn’t agree more.

Given the declining rate of growth of native-born Americans in the decades ahead predicted by official federal forecasters, the only other sure way to boost our work force is through more legal immigrants. Welcoming more foreign-born workers makes both economic and political sense. And in an ideal world, Congress and the President would agree on a comprehensive reform package. Since that’s not likely in the cards for now, let’s at least begin with high-skilled immigrants, who can help reverse our nation’s falling startup rate and provide a boost to our innovative capacity.

Authors

With President Obama expected to make a statement about immigration tonight, Washington is gearing-up for a fight over the President’s seeming willingness to exercise his executive authority to prevent the deportation of primarily low-skilled immigrants. While that’s worth watching, the more important economic picture risks getting lost: the impact that immigrants can bring to the American economy in the long-term. It’s the immigration discussion we ought to be having, and if the rumors are correct as of this writing, it’s the one the President will at least partially extend in the executive action that he will outline.

High-skilled immigrants are good for America, and we should encourage more of them to come here given recent trends in entrepreneurship, where more firms are dying than being created every year. But high-skilled immigrants could help turn that trend around — they are twice as likely to start businesses as native-born Americans. This is especially true in high-tech sectors, where immigrants are not only more likely to start firms, but also to patent new technological discoveries. Giving green cards to foreign students completing STEM degrees at U.S. universities, and to many more immigrant entrepreneurs, would increase income and employment opportunities for American workers across the board.

We have recently published new evidence at the Brookings Institution that supports the link between immigration reform and economic growth. Our research brings a new perspective — the importance of entrepreneurs — to an older idea: the link between greater population growth and economic expansion.

This connection was at the heart of concerns expressed by Harvard economist Alvin Hansen in his address, “Economic Progress and Declining Population Growth,” before the American Economic Association in 1938. Hansen worried that what he saw as falling rates of population growth and technological advance portended a slump in investment, which would lead to persistently low employment and income growth. Hansen’s forecast never came true, thanks to post-war booms in innovation and fertility rates.

Three-quarters of a century later, another Harvard economist, Larry Summers, has updated Hansen’s concept of “secular stagnation” to describe post-recession slow growth across much of North America and Europe. In the year since Summers first made his remarks, economists have been debating whether and to what extent his thesis will hold in the future.

Much less publicized is another debate that concerns the current and future state of U.S. economic growth — that of a pervasive decline in the rate of firm formation and economic dynamism. We and others have documented this decline in a broad range of sectors and regions throughout the United States during the last few decades—a decline that even reached the high-tech sector and so-called high-growth firms, the small group of (often young) businesses that are responsible for creating the bulk of U.S. jobs.

And the U.S. wasn’t alone. This decline was observed in other advanced economies of the OECD, suggesting that large global factors are at play.

This evidence runs counter to the narrative that an entrepreneurial renaissance is sweeping the globe, and the seeming endless technological change disrupting the economy. We also see plenty of those signs around us, but their impacts haven’t yet been reflected in the data. Even if they were, their effects would be following more than three decades of persistent decline.

Our most recent Brookings research suggests that slowing population growth hurts entrepreneurship. This was particularly true beginning in the 1980s in America’s West, Southwest, and Southeast regions — once places with the highest rates of new firm formation as the population surged in the 1970s. During the three decades that followed, however, the formation of new businesses fell partly because population growth slowed.

In other words, population growth matters.

George Mason University economist Tyler Cowenrecently warned that the “relatively neglected field” of population economics could hold answers to the period of slow growth facing much of the developed world. For Cowen, one solution is obvious: absorb more immigrants. We couldn’t agree more.

Given the declining rate of growth of native-born Americans in the decades ahead predicted by official federal forecasters, the only other sure way to boost our work force is through more legal immigrants. Welcoming more foreign-born workers makes both economic and political sense. And in an ideal world, Congress and the President would agree on a comprehensive reform package. Since that’s not likely in the cards for now, let’s at least begin with high-skilled immigrants, who can help reverse our nation’s falling startup rate and provide a boost to our innovative capacity.

Authors

]]>
http://www.brookings.edu/research/papers/2014/11/driving-decline-firm-formation-rate-hathaway-litan?rssid=litanr{A7F98C28-0298-44D2-9790-DA180B0C0538}http://webfeeds.brookings.edu/~/79132718/0/brookingsrss/experts/litanr~What%e2%80%99s-Driving-the-Decline-in-the-Firm-Formation-Rate-A-Partial-ExplanationWhat’s Driving the Decline in the Firm Formation Rate? A Partial Explanation

Executive Summary
Following a number of recent reports documenting a pervasive decline in the firm formation rate across a broad range of sectors and geographic regions in the United States during the last few decades, this report takes a first step at offering a partial explanation of contributing factors. To do this, we analyze variation in startup rates across the U.S. metropolitan areas during a three-decade period. Two prominent drivers of the cross-regional patterns stand out.

Slowing population growth in the West, Southwest, and Southeast regions since the early 1980s appears to be a major factor. Firm formation rates were highest in these regions in the late-1970s, when the data begin, and appear to be driven in no small part by expanding regional population growth in the preceding decade. When the rate of population growth in these regions began to decline, so did the rates of firm formation—declining most, on average, in these previously higher-growth regions.

The relationship between regional population growth and firm formation rates is remarkably strong, even after controlling for other factors—including unobserved time and regional effects (such as industrial and labor market composition, culture, and potentially, public policies).

A second major factor is business consolidation—a measure of economic activity occurring in businesses with more than one establishment. In previous research, we documented a pervasive increase in business consolidation across geographies and sectors during the last few decades. Here, we are able to link it with declines in firm formation—especially after including time and region fixed-effects. We concede that the relationship between this measure and firm formation is hardly settled—clearly, a number of unobserved factors could affect both simultaneously or causality could partially run in the other direction. Still, we are confident that this finding is robust, and encourage other researchers to build on our work here.

Some have raised the possible link between declining shares of the population in prime-entrepreneurship age (35 to 44 years) and falling firm formation rates, but our analysis of this relationship comes to more ambiguous conclusions. On the one hand, we find that this group is associated with increases in firm formation. But, on the other hand, changes in this measure don’t correlate with changes in the firm formation rate during the period of its observed decline. So, while an increase in this portion of the population might be a boost to startups in the future, we don’t believe it played a role in the recent decline.

We do not directly analyze the impact of public policies—such as regulation and taxes. Though these factors likely play some role, empirical and methodological limitations prevent us from including them here. Even so, we can explain a substantial portion of the decline and variation in the firm formation rate across metros without them.

Given the central role that new firms have played in the commercialization of transformative innovations that are responsible for rising living standards and job creation, we encourage others to continue this research where we have left off. Nonetheless, we believe our results make a good start at answering the central question raised by the startup trends we and others have documented: why?

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Authors

Executive Summary
Following a number of recent reports documenting a pervasive decline in the firm formation rate across a broad range of sectors and geographic regions in the United States during the last few decades, this report takes a first step at offering a partial explanation of contributing factors. To do this, we analyze variation in startup rates across the U.S. metropolitan areas during a three-decade period. Two prominent drivers of the cross-regional patterns stand out.

Slowing population growth in the West, Southwest, and Southeast regions since the early 1980s appears to be a major factor. Firm formation rates were highest in these regions in the late-1970s, when the data begin, and appear to be driven in no small part by expanding regional population growth in the preceding decade. When the rate of population growth in these regions began to decline, so did the rates of firm formation—declining most, on average, in these previously higher-growth regions.

The relationship between regional population growth and firm formation rates is remarkably strong, even after controlling for other factors—including unobserved time and regional effects (such as industrial and labor market composition, culture, and potentially, public policies).

A second major factor is business consolidation—a measure of economic activity occurring in businesses with more than one establishment. In previous research, we documented a pervasive increase in business consolidation across geographies and sectors during the last few decades. Here, we are able to link it with declines in firm formation—especially after including time and region fixed-effects. We concede that the relationship between this measure and firm formation is hardly settled—clearly, a number of unobserved factors could affect both simultaneously or causality could partially run in the other direction. Still, we are confident that this finding is robust, and encourage other researchers to build on our work here.

Some have raised the possible link between declining shares of the population in prime-entrepreneurship age (35 to 44 years) and falling firm formation rates, but our analysis of this relationship comes to more ambiguous conclusions. On the one hand, we find that this group is associated with increases in firm formation. But, on the other hand, changes in this measure don’t correlate with changes in the firm formation rate during the period of its observed decline. So, while an increase in this portion of the population might be a boost to startups in the future, we don’t believe it played a role in the recent decline.

We do not directly analyze the impact of public policies—such as regulation and taxes. Though these factors likely play some role, empirical and methodological limitations prevent us from including them here. Even so, we can explain a substantial portion of the decline and variation in the firm formation rate across metros without them.

Given the central role that new firms have played in the commercialization of transformative innovations that are responsible for rising living standards and job creation, we encourage others to continue this research where we have left off. Nonetheless, we believe our results make a good start at answering the central question raised by the startup trends we and others have documented: why?

Among the many complaints about the U.S. health-care system is its opacity when it comes to prices consumers actually pay. Few doctors tell patients about costs, partly because they don’t know themselves; insurers have the last word. All health-care economists I know of—whether or not they support the Affordable Care Act—have supported more price transparency so that patients can make better decisions about procedures or tests of limited value, or better understand whether a doctor is ordering such things to reduce the chances of a malpractice lawsuit.

Now comes Phillip Levine of the Brookings Institution to tell us that college prices work pretty much the same way. There is the sticker price and then there are actual prices, net of the best financial aid that students and their parents can negotiate.

But many students and families do not realize they can bargain. And when they do, they have little or no idea of what they realistically may gain.

Does this lack of transparency matter? Mr. Levine argues that it does, especially for students wanting to attend private, highly selective colleges. Given the high price of such schools—which for many families can exceed the cost of buying a home if they don’t receive financial assistance—it simply defies common sense that prospective attendees don’t have sufficient information to know whether they can afford a college before applying.

Mr. Levine suggests that federally required disclosures of the average net price, which are arranged by broad income category of an applicant’s family, aren’t helpful because averages can be heavily influenced by outliers in financial aid packages. Such aid may be determined on the basis of more than a family’s income. He suggests that colleges instead use simplified financial calculators that account for the multiple factors schools use to determine aid—of the kind that he developed for Wellesley College—and that they publish net median prices by income category, since medians eliminate the effects of outliers.

Now, if only health-care providers would do something similar.

Authors

Among the many complaints about the U.S. health-care system is its opacity when it comes to prices consumers actually pay. Few doctors tell patients about costs, partly because they don’t know themselves; insurers have the last word. All health-care economists I know of—whether or not they support the Affordable Care Act—have supported more price transparency so that patients can make better decisions about procedures or tests of limited value, or better understand whether a doctor is ordering such things to reduce the chances of a malpractice lawsuit.

Now comes Phillip Levine of the Brookings Institution to tell us that college prices work pretty much the same way. There is the sticker price and then there are actual prices, net of the best financial aid that students and their parents can negotiate.

But many students and families do not realize they can bargain. And when they do, they have little or no idea of what they realistically may gain.

Does this lack of transparency matter? Mr. Levine argues that it does, especially for students wanting to attend private, highly selective colleges. Given the high price of such schools—which for many families can exceed the cost of buying a home if they don’t receive financial assistance—it simply defies common sense that prospective attendees don’t have sufficient information to know whether they can afford a college before applying.

Mr. Levine suggests that federally required disclosures of the average net price, which are arranged by broad income category of an applicant’s family, aren’t helpful because averages can be heavily influenced by outliers in financial aid packages. Such aid may be determined on the basis of more than a family’s income. He suggests that colleges instead use simplified financial calculators that account for the multiple factors schools use to determine aid—of the kind that he developed for Wellesley College—and that they publish net median prices by income category, since medians eliminate the effects of outliers.

Now, if only health-care providers would do something similar.

Authors

]]>
http://www.brookings.edu/research/opinions/2014/10/28-decline-in-new-businesses-litan?rssid=litanr{178FDC95-91D7-455C-A031-3B623D6611E4}http://webfeeds.brookings.edu/~/77606484/0/brookingsrss/experts/litanr~Another-Reason-to-Worry-About-the-Decline-in-New-BusinessesAnother Reason to Worry About the Decline in New Businesses

My co-investigator, Ian Hathaway, and I have concentrated our worry that a declining start-up rate has contributed to and will continue to dampen growth in productivity, which is the engine of long-term improvement in living standards.

Federal Reserve Chairwoman Janet Yellen recently took notice of the declining rate of business formation in her widely reported speech on inequality. But as my Brookings colleague Richard V. Reeves pointed out, Ms. Yellen highlighted a very different reason to be concerned about the entrepreneurship trends: They have contributed to a decline in economic opportunity.

It is opportunity, after all, that drives the American dream. And those who worry about rising inequality do so in part, or even primarily, because they fear that rising inequality makes it more difficult for those in the middle or bottom of the income distribution, or their children, to rise to higher economic rungs.

Education is one way of doing that, but too many children from families stuck at the bottom are trapped in poorly performing schools and don’t have the same shot at advancing themselves as others from more privileged backgrounds.

Ms. Yellen argues that entrepreneurship offers another way for people to move up the economic ladder. Declining rates of new business formation thus give us another reason to worry about the slippage of the American dream.

Ms. Yellen has provided an additional powerful reason for policymakers, to the extent they can, to begin reversing the long-term decline in the start-up rate.

My co-investigator, Ian Hathaway, and I have concentrated our worry that a declining start-up rate has contributed to and will continue to dampen growth in productivity, which is the engine of long-term improvement in living standards.

Federal Reserve Chairwoman Janet Yellen recently took notice of the declining rate of business formation in her widely reported speech on inequality. But as my Brookings colleague Richard V. Reeves pointed out, Ms. Yellen highlighted a very different reason to be concerned about the entrepreneurship trends: They have contributed to a decline in economic opportunity.

It is opportunity, after all, that drives the American dream. And those who worry about rising inequality do so in part, or even primarily, because they fear that rising inequality makes it more difficult for those in the middle or bottom of the income distribution, or their children, to rise to higher economic rungs.

Education is one way of doing that, but too many children from families stuck at the bottom are trapped in poorly performing schools and don’t have the same shot at advancing themselves as others from more privileged backgrounds.

Ms. Yellen argues that entrepreneurship offers another way for people to move up the economic ladder. Declining rates of new business formation thus give us another reason to worry about the slippage of the American dream.

Ms. Yellen has provided an additional powerful reason for policymakers, to the extent they can, to begin reversing the long-term decline in the start-up rate.

There are so many things Americans take for granted–until we don’t have them. Just ask Californians and others in the West who are suffering through a record-breaking drought.

Put aside the question of whether man-made climate change has caused the problem. What matters now is: What is the solution?

The first reaction to shortages is to ration. Tell people they can’t water their lawns, then limit the amount of water they can use in their homes, and so forth. The result? No one is happy

Rationing is how the U.S. responded to oil shortages in the 1970s, and it led to long lines. No one was happy then either.

Ask an economist what to do any about shortage and it won’t be more than a nanosecond before he or she says: Let the market sort it out, without government intervention to aid specific interests, such as farmers, by setting artificially low prices (as has long been true in California).

To be sure, setting up water markets involves a lot of detailed work, most notably the construction of platforms for trading. A recent Brookings report goes through the issues and offers some sensible guidelines for allowing markets to eliminate shortages through the price mechanism, which is what we have done for oil since the 1980s.

The issues of equity and fairness under a market system must be resolved. We don’t want a society in which the rich can buy up all the water and leave the rest of us thirsty.

This problem can be largely addressed, however, by limiting the trading to municipalities or water districts, rather than individuals. In this way, high prices in a region can be spread across many people (although at the municipality level, some lesser degree of rationing may still be needed to ensure that any ceiling amounts paid for are not exceeded).

One way or another, the time has come for more market-driven solutions to water shortages.

Authors

There are so many things Americans take for granted–until we don’t have them. Just ask Californians and others in the West who are suffering through a record-breaking drought.

Put aside the question of whether man-made climate change has caused the problem. What matters now is: What is the solution?

The first reaction to shortages is to ration. Tell people they can’t water their lawns, then limit the amount of water they can use in their homes, and so forth. The result? No one is happy

Rationing is how the U.S. responded to oil shortages in the 1970s, and it led to long lines. No one was happy then either.

Ask an economist what to do any about shortage and it won’t be more than a nanosecond before he or she says: Let the market sort it out, without government intervention to aid specific interests, such as farmers, by setting artificially low prices (as has long been true in California).

To be sure, setting up water markets involves a lot of detailed work, most notably the construction of platforms for trading. A recent Brookings report goes through the issues and offers some sensible guidelines for allowing markets to eliminate shortages through the price mechanism, which is what we have done for oil since the 1980s.

The issues of equity and fairness under a market system must be resolved. We don’t want a society in which the rich can buy up all the water and leave the rest of us thirsty.

This problem can be largely addressed, however, by limiting the trading to municipalities or water districts, rather than individuals. In this way, high prices in a region can be spread across many people (although at the municipality level, some lesser degree of rationing may still be needed to ensure that any ceiling amounts paid for are not exceeded).

One way or another, the time has come for more market-driven solutions to water shortages.

Event Information

The Communications Act of 1934 created the Federal Communications Commission and outlined a comprehensive regulatory structure for overseeing spectrum-based and wire-based communications. The 80th anniversary of the passage of this important law provides an opportunity to reflect on the original intentions of the act and how it has been implemented.

On October 22, Governance Studies at Brookings hosted an event exploring the history, implementation and multiple legislative revisions to date of the Communications Act of 1934. A panel of experts discussed the FCC’s relationship with Congress, the executive branch and other regulatory agencies, along with the possible need to update the Act to reflect current and future digital economy developments, technology innovation, consumer preferences and other contemporary issues.

Event Information

The Communications Act of 1934 created the Federal Communications Commission and outlined a comprehensive regulatory structure for overseeing spectrum-based and wire-based communications. The 80th anniversary of the passage of this important law provides an opportunity to reflect on the original intentions of the act and how it has been implemented.

On October 22, Governance Studies at Brookings hosted an event exploring the history, implementation and multiple legislative revisions to date of the Communications Act of 1934. A panel of experts discussed the FCC’s relationship with Congress, the executive branch and other regulatory agencies, along with the possible need to update the Act to reflect current and future digital economy developments, technology innovation, consumer preferences and other contemporary issues.

In what has now become an iconic statement about American politics, and maybe politics everywhere, former White House Chief of Staff Rahm Emanuel (now Chicago Mayor) declared that “a crisis is a terrible thing to waste.” He was making the point that it is always hard to summon the will to enact big, new policy ideas, even when they appear perfectly logical. Until some dramatic development galvanizes people to act, they sit on the shelf. And what a pity it is if that dramatic moment passes, and there they still sit, perhaps never to be put into law or regulation.

Thinking about that phenomenon, you’d be wise to wonder: what transformative ideas are sitting on the shelf right now? Three of the biggest, I would argue, come from the work of economists. They address very specific problems in very smart ways. But they might only be adopted when concern about the federal government’s deficit is again at a fever pitch.

Congestion pricing

Multiple studies have shown what all Americans can see: in many places of the country, especially on too many of our nation’s bridges, our infrastructure is either crumbling or excessively crowded. By some accounts, the bills for just public facilities (excluding additional privately funded broadband investments) could run into trillions of dollars. In principle, even with huge federal budget deficits, such investments could be funded through a special “capital budget” as they are at the state level. But past proposals for a capital budget have gone nowhere, so the only politically realistic way of funding them instead is through some kind of public infrastructure bank, which at this writing has some bipartisan support, but still not enough to get the bank created and adequately funded.

Even if this should happen, however, many economists have argued for years that before much construction of additional roads in particular is undertaken, existing roads, which are less than full during off-peak hours, could be more rationally used, reducing somewhat the need for potentially hundreds of billions of dollars in new roads. That rational way is by charging drivers more during congested periods when their presence on the road generates “negative externalities” for other drivers.

However much congestion pricing may make sense to an economist, the politics make it all but a non-starter: people accustomed to driving on public roads for free are not likely to embrace these charges, even if they are told it will mean less taxes required for building new roads. The regressive nature of the charges only complicates the politics.

A very different result may be possible, however, as more states and localities authorize the construction of roads that are privately owned and financed, or even sell off existing roads and other infrastructure in order to relieve their own budgetary pressures. Private owners are likely to have greater freedom in how they set tolls than is the case for governments. Private ownership of roads and infrastructure raises a host of other issues — such as whether certain roads are deemed to be so essential that their rates are regulated to prevent monopoly exploitation — but in our “new normal” age of austerity, taxpayer funding of roads seems less and less likely, leaving private financing and ownership as the principal way to rebuild and expand a good portion of America’s aging physical infrastructure.

Medicare vouchers

Another idea waiting for implementation at some point that will have major implications for the entire health care industry is vouchers (euphemistically and for political reasons probably called “premium support”) for Medicare, and possibly Medicaid, as a replacement, or at least an option, for those over 55, in lieu of the current fee-for-service reimbursement system. Under such a system, beneficiaries would purchase health care insurance on their own (without regard to preexisting conditions, of course), with insurers receiving a support payment.

In some versions of this idea, initially proposed in the 1990s by Brookings Institution scholars Henry Aaron and Robert Reischauer, the supports would be geographically based, and in all versions would increase with the growth of the economy, and perhaps with the cost of medical care itself. Clearly, the lower the escalation factor for the voucher, the greater would be the incentives of premium support for medical care cost control, but also the greater risk that beneficiaries would have to pay more for care out of pocket (which for many seniors would translate into receiving less care).

Another long-time Brookings Senior Fellow (and public policy servant extraordinaire) Alice Rivlin briefly agreed on a premium support plan several years ago with Rep. Paul Ryan, the current chairman of the House Budget Committee, but the two later parted ways over the magnitude of the escalation factor. Even though medical cost inflation has slowed in recent years, economists have not agreed on how much of the slowdown is cyclical and how much is likely to be permanent.

Whatever the facts, the continued aging of the population means that Medicare spending will continue to rise, and it is because of this fact that federal policymakers eventually may be driven to adopt some kind of premium support plan. When then happens, look for even more pressure for medical cost control than exists now including downward pressure on provider earnings. Also look for more cost-effective medical delivery models, such as Minute-clinics in pharmacies, and also innovation and entrepreneurship aimed at cutting the growth of health care spending.

Tax on carbon

A third policy idea that has been on the shelf for some time and which has many intellectual “fathers” and “mothers” is a carbon tax, which has two rationales. One is to correct an “externality,” namely the contribution of carbon dioxide emissions to climate change (though the magnitude of that contribution continues to be hotly disputed, pun partially intended). A second benefit of a carbon tax is that its revenues could make a significant contribution toward long-term deficit reduction. For example, a tax of $20/ton on carbon, would raise roughly $1 trillion over a decade, though the net increase in revenue would be somewhat smaller to the extent that some of this amount would (as it should) be rebated to lower income households because of the tax’s regressive nature. A potentially more politically palatable way of introducing a carbon tax is to trade it for a reduction in the social security tax and thus keep the whole package revenue neutral, but at least tax a “bad” (pollution) while encouraging a “good” (the supply of and possibly the demand for more labor).

Any one of these ideas, if implemented, would change the economic environment for firms and compel them to respond strategically. The thinkers behind them would join the pantheon of the trillion dollar economists whose ideas have transformed business. For now, they’re on the shelf, still in waiting for their crisis.

Authors

In what has now become an iconic statement about American politics, and maybe politics everywhere, former White House Chief of Staff Rahm Emanuel (now Chicago Mayor) declared that “a crisis is a terrible thing to waste.” He was making the point that it is always hard to summon the will to enact big, new policy ideas, even when they appear perfectly logical. Until some dramatic development galvanizes people to act, they sit on the shelf. And what a pity it is if that dramatic moment passes, and there they still sit, perhaps never to be put into law or regulation.

Thinking about that phenomenon, you’d be wise to wonder: what transformative ideas are sitting on the shelf right now? Three of the biggest, I would argue, come from the work of economists. They address very specific problems in very smart ways. But they might only be adopted when concern about the federal government’s deficit is again at a fever pitch.

Congestion pricing

Multiple studies have shown what all Americans can see: in many places of the country, especially on too many of our nation’s bridges, our infrastructure is either crumbling or excessively crowded. By some accounts, the bills for just public facilities (excluding additional privately funded broadband investments) could run into trillions of dollars. In principle, even with huge federal budget deficits, such investments could be funded through a special “capital budget” as they are at the state level. But past proposals for a capital budget have gone nowhere, so the only politically realistic way of funding them instead is through some kind of public infrastructure bank, which at this writing has some bipartisan support, but still not enough to get the bank created and adequately funded.

Even if this should happen, however, many economists have argued for years that before much construction of additional roads in particular is undertaken, existing roads, which are less than full during off-peak hours, could be more rationally used, reducing somewhat the need for potentially hundreds of billions of dollars in new roads. That rational way is by charging drivers more during congested periods when their presence on the road generates “negative externalities” for other drivers.

However much congestion pricing may make sense to an economist, the politics make it all but a non-starter: people accustomed to driving on public roads for free are not likely to embrace these charges, even if they are told it will mean less taxes required for building new roads. The regressive nature of the charges only complicates the politics.

A very different result may be possible, however, as more states and localities authorize the construction of roads that are privately owned and financed, or even sell off existing roads and other infrastructure in order to relieve their own budgetary pressures. Private owners are likely to have greater freedom in how they set tolls than is the case for governments. Private ownership of roads and infrastructure raises a host of other issues — such as whether certain roads are deemed to be so essential that their rates are regulated to prevent monopoly exploitation — but in our “new normal” age of austerity, taxpayer funding of roads seems less and less likely, leaving private financing and ownership as the principal way to rebuild and expand a good portion of America’s aging physical infrastructure.

Medicare vouchers

Another idea waiting for implementation at some point that will have major implications for the entire health care industry is vouchers (euphemistically and for political reasons probably called “premium support”) for Medicare, and possibly Medicaid, as a replacement, or at least an option, for those over 55, in lieu of the current fee-for-service reimbursement system. Under such a system, beneficiaries would purchase health care insurance on their own (without regard to preexisting conditions, of course), with insurers receiving a support payment.

In some versions of this idea, initially proposed in the 1990s by Brookings Institution scholars Henry Aaron and Robert Reischauer, the supports would be geographically based, and in all versions would increase with the growth of the economy, and perhaps with the cost of medical care itself. Clearly, the lower the escalation factor for the voucher, the greater would be the incentives of premium support for medical care cost control, but also the greater risk that beneficiaries would have to pay more for care out of pocket (which for many seniors would translate into receiving less care).

Another long-time Brookings Senior Fellow (and public policy servant extraordinaire) Alice Rivlin briefly agreed on a premium support plan several years ago with Rep. Paul Ryan, the current chairman of the House Budget Committee, but the two later parted ways over the magnitude of the escalation factor. Even though medical cost inflation has slowed in recent years, economists have not agreed on how much of the slowdown is cyclical and how much is likely to be permanent.

Whatever the facts, the continued aging of the population means that Medicare spending will continue to rise, and it is because of this fact that federal policymakers eventually may be driven to adopt some kind of premium support plan. When then happens, look for even more pressure for medical cost control than exists now including downward pressure on provider earnings. Also look for more cost-effective medical delivery models, such as Minute-clinics in pharmacies, and also innovation and entrepreneurship aimed at cutting the growth of health care spending.

Tax on carbon

A third policy idea that has been on the shelf for some time and which has many intellectual “fathers” and “mothers” is a carbon tax, which has two rationales. One is to correct an “externality,” namely the contribution of carbon dioxide emissions to climate change (though the magnitude of that contribution continues to be hotly disputed, pun partially intended). A second benefit of a carbon tax is that its revenues could make a significant contribution toward long-term deficit reduction. For example, a tax of $20/ton on carbon, would raise roughly $1 trillion over a decade, though the net increase in revenue would be somewhat smaller to the extent that some of this amount would (as it should) be rebated to lower income households because of the tax’s regressive nature. A potentially more politically palatable way of introducing a carbon tax is to trade it for a reduction in the social security tax and thus keep the whole package revenue neutral, but at least tax a “bad” (pollution) while encouraging a “good” (the supply of and possibly the demand for more labor).

Any one of these ideas, if implemented, would change the economic environment for firms and compel them to respond strategically. The thinkers behind them would join the pantheon of the trillion dollar economists whose ideas have transformed business. For now, they’re on the shelf, still in waiting for their crisis.

Many have characterized Vergara as the conservative version of the U.S. Supreme Court’s landmark decision in Brown v. Board of Education, which in 1954 struck down racially segregated schools as a violation of the 14th Amendment’s equal protection clause. The impact could be revolutionary.

Vergara has been appealed by Gov. Jerry Brown and by state teachers’ associations; its fate rests in California’s higher courts. But the rationale behind the June decision almost certainly will lead to constitutional challenges in other states.

Research by my Brookings colleague Mark Dynarski suggests that any potential plaintiffs will have to choose carefully where to file suit, because although teachers in schools with large concentrations of low-income students tend to be less experienced than teachers in other schools, their effectiveness does not, on average, significantly lag teachers in more affluent schools. But Mr. Dynarksi also reports on studies showing large variations among school districts in the difference in teacher effectiveness between schools with less and more affluent students, which could augur well for potential plaintiffs in poorly performing districts.

If Vergara is upheld on appeal and courts in other states adopt a similar ruling, one implication that I have not seen much discussed concerns the impact on teacher salaries. If tenure rules are struck down or weakened, teaching would look much more like private-sector jobs, where the risks of layoffs and pay for performance are routine. Higher risk in teaching would require localities and states to increase teacher salaries on average if taxpayers want to preserve or, ideally, enhance student outcomes. Furthermore, it may be necessary economically and, ultimately, legally to pay teachers who work in less affluent schools more in order to attract the better instructors who can ensure more equal student outcomes.

Faced with these possible financial pressures, school districts affected byVergara­­­-type rulings are likely to turn first to cutting central overhead to fund higher teacher pay. Ultimately, higher pay may require higher local taxes. Would taxpayers be willing to step up to help assure more equal outcomes? If they don’t, might liberals who now may be opposing Vergara then use its reasoning to argue that higher taxes to fund education are constitutionally necessary to ensure that low-income or minority students are not deprived of equal protection under the law?

Given concerns over growing income inequality, the answers to these questions could have large and lasting consequences for our economy and society. Even if Vergara is overturned on appeal and other state courts do not follow its reasoning, we still face the challenge of providing more equitable education to students from disadvantaged backgrounds in many areas of the country.

Many have characterized Vergara as the conservative version of the U.S. Supreme Court’s landmark decision in Brown v. Board of Education, which in 1954 struck down racially segregated schools as a violation of the 14th Amendment’s equal protection clause. The impact could be revolutionary.

Vergara has been appealed by Gov. Jerry Brown and by state teachers’ associations; its fate rests in California’s higher courts. But the rationale behind the June decision almost certainly will lead to constitutional challenges in other states.

Research by my Brookings colleague Mark Dynarski suggests that any potential plaintiffs will have to choose carefully where to file suit, because although teachers in schools with large concentrations of low-income students tend to be less experienced than teachers in other schools, their effectiveness does not, on average, significantly lag teachers in more affluent schools. But Mr. Dynarksi also reports on studies showing large variations among school districts in the difference in teacher effectiveness between schools with less and more affluent students, which could augur well for potential plaintiffs in poorly performing districts.

If Vergara is upheld on appeal and courts in other states adopt a similar ruling, one implication that I have not seen much discussed concerns the impact on teacher salaries. If tenure rules are struck down or weakened, teaching would look much more like private-sector jobs, where the risks of layoffs and pay for performance are routine. Higher risk in teaching would require localities and states to increase teacher salaries on average if taxpayers want to preserve or, ideally, enhance student outcomes. Furthermore, it may be necessary economically and, ultimately, legally to pay teachers who work in less affluent schools more in order to attract the better instructors who can ensure more equal student outcomes.

Faced with these possible financial pressures, school districts affected byVergara­­­-type rulings are likely to turn first to cutting central overhead to fund higher teacher pay. Ultimately, higher pay may require higher local taxes. Would taxpayers be willing to step up to help assure more equal outcomes? If they don’t, might liberals who now may be opposing Vergara then use its reasoning to argue that higher taxes to fund education are constitutionally necessary to ensure that low-income or minority students are not deprived of equal protection under the law?

Given concerns over growing income inequality, the answers to these questions could have large and lasting consequences for our economy and society. Even if Vergara is overturned on appeal and other state courts do not follow its reasoning, we still face the challenge of providing more equitable education to students from disadvantaged backgrounds in many areas of the country.

Inventor Jay Walker may not be an economist, but the successes of the company he founded is rooted behind the economics of price.

Innovation is one of the latest buzz words you hear everywhere – in conversations about what firms need to do to stay on top of their game (and to keep their stock prices up), and on what the U.S. economy needs to keep doing in to enhance living standards for itscitizens.

It is only natural to think of inventors, entrepreneurs and established businesses as being key to innovation. But one normally doesn’t hear the words “economist” and “innovation” in the same sentence, unless it is about the views of the economist about innovation.

I have recently written a book, Trillion Dollar Economists, centered around a very different notion, one which many economists may not appreciate about their profession – namely, that economists themselves have come up with ideas that either directly or indirectly have had hugely positive impacts on U.S. business. My central audience, however, is business executives and entrepreneurs themselves (and also students and would-be students of the subject, hopefully demonstrating its practical usefulness which may not be readily apparent in the math and chart driven way in which the subject continues to be taught).

One excellent example of a direct impact is the invention of “name your price” travel by Priceline.com. The inventor, Jay Walker, was not a professional economist, though he obviously paid close attention to the economics courses he took as an undergraduate at Cornell University in coming up with an innovative economic idea that has since revolutionized the travel industry.

That idea was more complicated than simply asking consumers to name their own price. For if that is all it was, then travelers would bid a dollar or two, or even pennies – prices that the airlines and hotels listed on Priceline obviously could never accept and stay in business. There was further complication. Airline seats and hotel rooms, or at least the right to use them on a particular day at a particular time, are no different than fruit: they are perishable. Any unsold seats on a given flight or for unbooked hotel rooms for any given day disappear after the flight takes off or the day is over.

Walker and his colleagues brainstormed how to solve three interrelated problems confronting all sellers of perishable merchandise, of which airline travel and the hotel business are prime examples:

How can sellers discount the seats or the rooms (or any perishable item, for that matter) and attract new buyers without encouraging or allowing other buyers who are willing to pay full price from also taking advantage of the discount?

How can regular, full-price customers be discouraged from delaying their purchases in order to receive last-minute discounted fares or prices?

Because sellers cannot see the demand curve for their products (how many buyers there are at each price), they cannot discover it without lowering their prices in a way that cuts into their profits.

Walker’s team came up with the “conditional price offer” that solved all of these problems and is responsible for the travel revolution that made Priceline into a $60 billion-plus market cap company, while transforming the travel industry. The conditional price offer is one which says to travelers that must pay what they bid if the seller, the airline or the hotel, accepts the bid. Priceline ensures this will happen by requiring travelers to provide their credit card information up front.

The conditional price offer also signals to travelers who want a Priceline reservation that they must make serious bids – below the going market rate to be sure, but still high enough to induce the airline or hotel to accept the bid – if consumers really want the ticket or the room.

The genius of the conditional price offer is that has no effect on full price or regular customers, nor did these customers have any incentive to submit last minute low-price offers for what, in essence, were somewhat impaired versions of the normal service: flights whose times or departure airports (within a given radius of the customer’s departure location) only Priceline could control.

Name your own price travel appeals primarily, or course, to leisure travelers (and perhaps a few business travelers really trying to save money) who cared only about price and were flexible on other terms. In more technical terms, Priceline thus targeted the most price-sensitive customers on the demand curve for travel, and ignored other travelers.

The rest, as they say, is history. Using a series of clever television ads, starring William Shatner from Star Trek, Priceline quickly became a phenomenon in the late 1990s, had some growing pains after the Internet bust, but has gone on to become one of the leading travel booking sites on the web. Walker left the company long before all of this success was achieved, moving on to patent inventions relating to vending machines and inventing and manufacturing casino games. At last reckoning, Priceline’s market cap exceeds $60 billion – all from the implementation of a new economic idea that was a twist on what all undergrads learn about economics and consumer behavior in their introduction to the subject.

Walker’s story proves that one of the ways of transferring economic ideas from the Ivory Tower to business is through the entrepreneurial efforts of single individuals trained in economics. Other ways include hiring economists full-time, as a number of Internet companies are doing, and as I predict many more will do in the future. After all, there is much more for economists to do than think up or apply economic ideas and suggest putting them into practice.

The big data revolution has induced many firms to look for ways in which they can harness data about their consumers, suppliers, or anything else out there to refine their products, their marketing strategies or cost control efforts. Much of the analytical work required to make sense of Big Data is carried out by statisticians—ideally, those also having good skills in computer science. I am one among many who believe that practitioners of data science will be one of the hottest and best paid careers in at least the first half of the 21st century (any students out there, are you paying attention?).

But there remains a role for economists, who not only have statistical training as part of their toolkit, but also a framework for analyzing business problems and challenges. Statisticians can help from having a guiding hand when trying to discover hard-to-find correlations that will stand the test of time and be relevant to predicting future behavior, rather than representing some statistical quirk. Economists can provide that guiding hand.

The great British economist John Maynard Keynes famously wrote “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” That statement remains as true today as it was when it was written roughly eight decades ago – with one amendment: many of the economists who have had and are still having important impacts on U.S. business are still very much alive.

Authors

Inventor Jay Walker may not be an economist, but the successes of the company he founded is rooted behind the economics of price.

Innovation is one of the latest buzz words you hear everywhere – in conversations about what firms need to do to stay on top of their game (and to keep their stock prices up), and on what the U.S. economy needs to keep doing in to enhance living standards for itscitizens.

It is only natural to think of inventors, entrepreneurs and established businesses as being key to innovation. But one normally doesn’t hear the words “economist” and “innovation” in the same sentence, unless it is about the views of the economist about innovation.

I have recently written a book, Trillion Dollar Economists, centered around a very different notion, one which many economists may not appreciate about their profession – namely, that economists themselves have come up with ideas that either directly or indirectly have had hugely positive impacts on U.S. business. My central audience, however, is business executives and entrepreneurs themselves (and also students and would-be students of the subject, hopefully demonstrating its practical usefulness which may not be readily apparent in the math and chart driven way in which the subject continues to be taught).

One excellent example of a direct impact is the invention of “name your price” travel by Priceline.com. The inventor, Jay Walker, was not a professional economist, though he obviously paid close attention to the economics courses he took as an undergraduate at Cornell University in coming up with an innovative economic idea that has since revolutionized the travel industry.

That idea was more complicated than simply asking consumers to name their own price. For if that is all it was, then travelers would bid a dollar or two, or even pennies – prices that the airlines and hotels listed on Priceline obviously could never accept and stay in business. There was further complication. Airline seats and hotel rooms, or at least the right to use them on a particular day at a particular time, are no different than fruit: they are perishable. Any unsold seats on a given flight or for unbooked hotel rooms for any given day disappear after the flight takes off or the day is over.

Walker and his colleagues brainstormed how to solve three interrelated problems confronting all sellers of perishable merchandise, of which airline travel and the hotel business are prime examples:

How can sellers discount the seats or the rooms (or any perishable item, for that matter) and attract new buyers without encouraging or allowing other buyers who are willing to pay full price from also taking advantage of the discount?

How can regular, full-price customers be discouraged from delaying their purchases in order to receive last-minute discounted fares or prices?

Because sellers cannot see the demand curve for their products (how many buyers there are at each price), they cannot discover it without lowering their prices in a way that cuts into their profits.

Walker’s team came up with the “conditional price offer” that solved all of these problems and is responsible for the travel revolution that made Priceline into a $60 billion-plus market cap company, while transforming the travel industry. The conditional price offer is one which says to travelers that must pay what they bid if the seller, the airline or the hotel, accepts the bid. Priceline ensures this will happen by requiring travelers to provide their credit card information up front.

The conditional price offer also signals to travelers who want a Priceline reservation that they must make serious bids – below the going market rate to be sure, but still high enough to induce the airline or hotel to accept the bid – if consumers really want the ticket or the room.

The genius of the conditional price offer is that has no effect on full price or regular customers, nor did these customers have any incentive to submit last minute low-price offers for what, in essence, were somewhat impaired versions of the normal service: flights whose times or departure airports (within a given radius of the customer’s departure location) only Priceline could control.

Name your own price travel appeals primarily, or course, to leisure travelers (and perhaps a few business travelers really trying to save money) who cared only about price and were flexible on other terms. In more technical terms, Priceline thus targeted the most price-sensitive customers on the demand curve for travel, and ignored other travelers.

The rest, as they say, is history. Using a series of clever television ads, starring William Shatner from Star Trek, Priceline quickly became a phenomenon in the late 1990s, had some growing pains after the Internet bust, but has gone on to become one of the leading travel booking sites on the web. Walker left the company long before all of this success was achieved, moving on to patent inventions relating to vending machines and inventing and manufacturing casino games. At last reckoning, Priceline’s market cap exceeds $60 billion – all from the implementation of a new economic idea that was a twist on what all undergrads learn about economics and consumer behavior in their introduction to the subject.

Walker’s story proves that one of the ways of transferring economic ideas from the Ivory Tower to business is through the entrepreneurial efforts of single individuals trained in economics. Other ways include hiring economists full-time, as a number of Internet companies are doing, and as I predict many more will do in the future. After all, there is much more for economists to do than think up or apply economic ideas and suggest putting them into practice.

The big data revolution has induced many firms to look for ways in which they can harness data about their consumers, suppliers, or anything else out there to refine their products, their marketing strategies or cost control efforts. Much of the analytical work required to make sense of Big Data is carried out by statisticians—ideally, those also having good skills in computer science. I am one among many who believe that practitioners of data science will be one of the hottest and best paid careers in at least the first half of the 21st century (any students out there, are you paying attention?).

But there remains a role for economists, who not only have statistical training as part of their toolkit, but also a framework for analyzing business problems and challenges. Statisticians can help from having a guiding hand when trying to discover hard-to-find correlations that will stand the test of time and be relevant to predicting future behavior, rather than representing some statistical quirk. Economists can provide that guiding hand.

The great British economist John Maynard Keynes famously wrote “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” That statement remains as true today as it was when it was written roughly eight decades ago – with one amendment: many of the economists who have had and are still having important impacts on U.S. business are still very much alive.